Opportunity and uncertainty collide in US real estate debt markets
Political volatility and economic instability present challenges for US private debt investors, but participants in PERE Credit’s roundtable remain optimistic about the prospects for capital deployment.
It has been a challenging year for the US real estate debt managers gathered for the PERE Credit US roundtable discussion. Over the course of 2025 fluctuating trade policy, geopolitical uncertainty and concerns over the sustainability of the expanding federal deficit have combined to depress consumer and business sentiment. The perception of growing economic risk has also impacted bond markets, with 10-year Treasury yields increasing to 4.25% at the time of writing.
That has not prevented a modest recovery in the real estate investment market, however, and capital is still being deployed. CBRE figures show $96 billion of real estate was traded in Q2 2025, representing a 13% year-on-year increase. The broker expects commercial real estate investment activity to grow by 10% over the course of the year to $437 billion.
Meanwhile the CBRE Lending Momentum Index, which tracks loans originated or brokered by the firm, rose by 45% year-over-year but fell by 6% quarter-over-quarter at the end of Q2 as tariff announcements and policy uncertainty impacted lending conditions and borrowing costs in April and May. The market regained momentum in June, however, with financing volumes up by 40% year-over-year.
There are also positive indications for capital formation. PERE research shows that $9.95 billion was raised for North American private real estate debt strategies in the first six months of 2025, a 51% increase on H1 2024, albeit less than the $12.57 billion committed in H2 2024.
Lenders have little choice but to shut out the noise and carry on, says Andrew Chen, head of real estate investments at credit specialist Beach Point Capital Management. “We have been productive, but it has definitely been challenging. I can’t think of an industry that has had it easy this year. Regardless of the outcome of some of the policy changes, the sheer volatility of information has been a lot to deal with, so all we can do is stick to our knitting.”
For manager Affinius Capital, 2025 will probably see the second highest volume of credit transactions since the firm has been in business, exceeded only in 2021, says head of lending Michael Lavipour. Recapitalizations of 2021-vintage acquisitions that were financed with at-the-time cheap floating rate debt, are providing a strong deals pipeline. He notes that banks can no longer provide finance at high the LTVs that those borrowers require. “That is fueling activity whether it be for bridge lending or higher-octane preferred equity.”
Development loans
Even though construction activity has slowed, there is nonetheless demand for development loans, he adds. He attributes the need to banks’ reluctance to offer development finance because of stricter capital charge requirements. Meanwhile banks frequently consider syndicated loans too risky except when the strongest sponsors are involved.
Raising LP capital for development deals is difficult, he says, but that means that there is a strong likelihood that well-capitalized borrowers offer attractive risk characteristics for lenders. “If someone is building a project in today's environment, and they can find capital on the equity side, it's probably a good bet as a lender.”
Jeffrey Williams, head of global commercial real estate debt investments at Schroders Capital, also sees strong prospects for development lending, particularly for multifamily housing construction. “Supply is down to 10-year lows, so if you’re a developer who gets something out of the ground today, you’re much better off than you would have been a couple of years ago. It seems the first thing a lot of GPs do is to check if there is financing available and what it costs. Then they try to raise LP capital. If they are successful at that, then that’s a stamp of approval for the project,” he says.
Because raising LP equity is so challenging, developers are forced to utilize a combination of funding sources that may include mortgage debt, mezzanine finance, preferred equity and co-funding with other GPs, says Chen, which constitutes an opportunity for a firm like Beach Point Capital that can step in to fund the whole capital stack at upwards of 80% loan-to-cost.
“We then look to syndicate parts of that debt off, or use capital markets execution to price the senior and the junior pieces a little more efficiently, so we will typically end up holding a 30 to 40% piece of the overall capital structure at a high teens to low 20s return for multifamily construction, which is super-attractive for us,” he says.
Housing specialist Pretium is one of the largest single-family landlords in the US as well as being a lender for the multifamily and home builder sectors. Managing director Brendan Bosman says that following a 15-year period when prices rose across the board, there is increasing differentiation between US housing markets. Some locations, for example Texas, are exhibiting signs of oversupply, while other regions, such as the Midwest, Northeast, and parts of the West coast are still experiencing price rises, which makes careful market selection crucial.
US regional banks, formerly the chief source of finance for home builders and land developers, have pulled back, opening the market to alternative lenders like Pretium to offer project loans or repeat-borrowing facilities. “We have lent about $1 billion to home builders this year, and we can often get corporate guarantees as well. They aren’t corporate-grade credit, but a lot of home builders have big balance sheets,” he says. He also notes the difficulty of raising LP capital, however. “For probably about a third of the deals we look at, the equity doesn't get raised.”
Lee Levy, head of real estate debt at manager Kayne Anderson, says that development deals will account for around 20% of the firm’s US loan originations this year. Kayne Anderson has focused largely on middle-market deals with an all-in cost of around $100 million. “For some other players, and certainly for the banks, that’s too small, and we are doing it in growth markets which maybe aren’t on everybody’s radar.”
Interest rate cuts
At the beginning of 2025 most economists expected to see at least two cuts to the federal interest rate over the course of the year. But concern over the risk of tariff-fueled inflation has held the Fed back, and as the roundtable took place at the end of July none had eventuated.
The market is now anticipating a single cut of 25 basis points in the third or fourth quarter, says Levy. That could be important for bolstering consumer confidence he argues, because default rates on credit cards and auto loans have been increasing. He believes is unlikely to make a significant difference to real estate finance transactions, however. “It won’t drive refinancing if short term borrowing becomes a little bit cheaper. Most investors focus on the 10-year rate,” he says.
Schroders Capital manages asset-backed securities, as well as private debt, and the firm has observed that high-end consumer borrowers are now beginning to come under pressure, a concerning development for the economy, says Williams. “We are definitely seeing an uptick in delinquencies. That is an issue that people are keeping an eye on. Historically, when the Fed lowers rates, it is because they are worried about the economy and see weakness, at least in the near term.”
A rates reduction will not be a panacea for real estate debt market issues, but it could help reduce the need for the preferred equity piece that is currently required to make some deals viable, says Bosman. “We will certainly see more transaction volume for every 25-basis point cut that the Fed makes.”
It is curious that in a period of high inflation when credit spreads have historically tended to widen, they have tightened over the past year instead, observes Levy. While spreads are tightening, loans are still attractive on a relative value basis, says Chen, assisted by the fact that back leverage providers’ margins have tightened as well, so that lenders can tighten the spread over Treasuries they are offering to the borrower because their own funding has become cheaper.
“There is also just the fact that there is a tremendous amount of private capital in the race, with fierce competition and a lot of groups fighting for similar deals,” suggests Bosman. “I think it’s both of those things,” says Levy. “Banks and insurance companies began to wake up last year after lending very little for 18 months, so then we saw tightening spreads, but levered returns didn’t get worse.”
Back leverage the “secret sauce”
For managers with the banking relationships to utilize it, back leverage is the “secret sauce” of the loan business, allowing them to scale up quickly and generate higher returns, says Chen. Beach Point uses structural note on note leverage, not repo lines or warehouse facilities. “It just makes more sense for banks to lend to groups like ours, as opposed to just doing it themselves. They need fewer people and get better deal flow,” he argues. “Our teams have gotten very good at closing and funding everything simultaneously. It takes time to build that capability out though.”
Banks will ultimately return to substantial direct lending, but at present they are unable to offer the “last dollar” leverage that borrowers need, says Lavipour. In the meantime, banks and insurance companies are increasingly willing to work in partnership with private credit providers. “Three or four years ago, insurance didn’t really participate in note on note, or the senior part of the capital stack with us, and now that’s become a big trend. They aren’t staffed to put out all the money that they need to deploy in the real estate space, so they're looking for other origination channels.”
It is shaping up to be a big year for alternative lenders adding new counterparties for senior debt through the establishment of private credit partnerships with banks, he continues. “They do note on note and keep origination fees but drive products into private credit managers. For us, it's a great thing, because we get the benefit of their origination capability and access to their client base.” Insurance companies are also likely to contribute meaningfully to Affinius’ next round of debt fundraising, he adds.
“We are finding the insurance company appetite for non-conventional mortgage products in separate managed accounts to be insatiable,” claims Pretium’s Bosman. “They like home builder finance products too, because it yields quite a bit more than some other investments.”
Money center banks
For a period last year there was an opportunity for debt funds to write loans on investment grade quality stabilized assets in the northeast US, but banks are already returning to that segment of the market, says Schroders Capital’s Williams. “They are definitely coming back, but they are being picky, and pricing aggressively for high quality deals.” Life insurance companies are doing the same, he adds, because loans offer 50 to 100 points of yield pickup when benchmarked against BBB corporate bonds.
Unlike US regional banks, major money center banks are not overexposed to real estate and have “endless” capital to deploy with top-level sponsors, says Levy. “It’s when you go down a notch or two to a local sharpshooter GP, an owner-operator, a family office or a high net worth individual that those banks become less interested.”
He observes that small and mid-sized banks are overweight in real estate by around $300 billion. “That will probably have to come off their balance sheets, either through loan sales or through foreclosures or just repayments, before we're going to see them step back in,” he says.
It is unlikely that banks’ appetite for construction loans will return in the year ahead, however, says Bosman. “There will be a large void in that space that needs to be filled, as well as for preferred equity to help fill the valuation gap when refinancing.”
The best opportunities remain in the private debt markets, says Williams. “Right now, we are seeing more value in heavier-touch type loans like development. But we are waiting for an opportunity in the public debt markets, which come every now and then and then everyone pounces, so it's a shorter duration opportunity.”
The overarching story is the increasing power of private capital, particularly for lending, argues Chen. He believes that in a period of instability, securitized markets are more likely to be hit by a sudden fall. “Private capital is just more durable. It's more dependable. It's just going to continue taking more market share, and more borrowers understand that,” he concludes. “It seems like everything is set up for that to happen throughout the rest of this year and into the foreseeable future.”
A beautiful bill for real estate?
Participants consider the implications for the sector of Trump’s signature legislation.
On July 4, 2025, President Donald Trump signed the “One Big Beautiful Bill Act” into law. Among its headline provisions are the extension of Trump’s 2017 tax reductions and a $1 trillion cut to the Medicaid healthcare program. The Congressional Budget Office estimates the bill could add $3.3 trillion to the federal deficit over the next decade, a forecast disputed by the White House.
Kayne Anderson invests in the healthcare sector and has analyzed the potential implications of the Act. Levy predicts the greatest impact will fall on the hospital system and skilled nursing within the senior housing sector. Kayne Anderson invests mainly in medical office and outpatient care facilities for private-pay patients and as such will be insulated from the effect of healthcare cuts, he argues. “For us, we think it will be a net positive. A lot of the cuts are being phased in over two years, so hopefully it won’t have as big a negative impact as some people believe.”
Meanwhile, the healthcare sector still benefits from demographic tailwinds, in particular the ageing of the wealthy baby boomer generation, he adds. “We have 65 million people over 65 and 11,000 people a day turning 65. In 15 years, that 65-plus population will increase to 80 million.”
Beach Point Capital’s Chen notes that the Act permanently extends the opportunity zone (OZ) program, without which investments in OZs after December 31, 2026, would have no longer been eligible for tax benefits. “A lot of capital has formed around OZ opportunities, and although performance has been a mixed bag, for multifamily construction, on the margin, it's positive,” he says.
Borrowers see the value in simple capital structures
Ease of execution is sometimes more important than headline borrowing costs, say the participants.
Lenders face a quandary when seeking to balance the requirements of borrowers with their duty to investors, particularly in recapitalization or refinancing scenarios, says Affinius’ Lavipour. Sponsors frequently want to put in less equity, secure a lower rate, or negotiate more flexibility. “There is an art to getting a good enough restructuring deal where you’re keeping the client happy, who is ultimately going to feed new business into your fund, while also protecting your investors.”
When a prospective borrower is embarking on a new venture in the current challenging market environment, and has managed to raise LP capital, that often suggests they have a durable business plan and a good asset in a good location to underwrite, says Chen: “The cream rises to the top.” Those sponsors see the value in simplicity, with a single partner financing the whole capital stack, instead of multiple lenders, he observes. “They will pay a bit more to be able to just focus on successful execution.”
Pretium’s Bosman has noted a similar mindset among borrowers in the home building sector. Whereas debt fund capital comes at a higher cost than bank lending, managing relationships with several local banks, particularly on syndicated loans, consumes more time and resources than maintaining an established a relationship with an alternative lender, he argues. “Some home builders tell me they have two or three full time employees managing bank loans. By paying a little bit more they can make things like managing drawdowns easier and save money on staff costs by having a simpler capital structure.”
Jeffrey Williams is Head of Global Commercial Real Estate Debt Investments at Schroders Capital, overseeing the firm's $5 billion CRE debt business that is divided between commercial mortgage-backed securities and private commercial real estate loans. The latter accounts for around $2.6 billion of AUM including stabilized loans, as well as opportunistic strategies covering land acquisition, pre-development, construction financing and bridge loans.
This article first appeared in the September 2025 issue of PERE
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