The Rise of Private Credit in Commercial Real Estate

Why debt funds are filling the gap left by banks, what terms look like, and when developers should use them.

Commercial real estate (CRE) is living through a once-in-a-generation reset. Higher base rates, tougher bank oversight, sector-specific stress (especially offices), and a wall of maturities have combined to make traditional bank credit scarcer and slower. Into that vacuum steps private credit—specialized lenders and debt funds that can move quickly, underwrite complexity, and price risk dynamically. In 2025, private credit is no longer a “sidecar” to bank lending. It is the market for many deals.

Why banks pulled back—and why that opened the door

1) Capital rules and supervisory pressure. U.S. banks spent 2023–2024 preparing for the so-called “Basel III Endgame,” a capital reform that, as drafted, would have lifted risk-weighted assets and raised capital charges for credit exposures—including CRE—particularly for the largest banks. Even before final rules, the overhang encouraged caution: tighter underwriting, higher spreads, and lower proceeds. Industry groups warned the package would constrain credit for income-producing property.

2) Lending standards stayed tight. The Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) throughout 2024–2025 showed banks either keeping CRE standards tight or tightening further, with small/regional banks the most conservative. That translated to slower processing, lower LTVs, and more structure.

3) The maturity wall is real. Nearly $1 trillion of CRE debt is slated to mature annually in mid-decade, peaking around 2027. Many of those loans were underwritten at lower coupons and higher valuations; refinancing at today’s rates and cap rates is tough—especially for transitional assets. When banks hesitate, debt funds step in with bridge, mezzanine, or preferred equity.

4) Banks are selling loans. To de-risk balance sheets, some banks have sold blocks of CRE loans at discounts, often to private credit platforms. Blackstone’s Real Estate Debt Strategies (BREDS), for example, bought roughly $2B of CRE loans from Atlantic Union in mid-2025—one of several similar purchases across the cycle. That recycling of assets frees banks and channels deal flow to private credit.

Bottom line: regulation, risk management, and economics made banks choosier. Private credit scaled to meet demand.

How big is private credit—and who are the players?

Private credit has grown from a niche to a core allocation for institutions and insurers. Direct lending AUM reached the high-$600 billions globally by 2024, with fundraising near $200B and growing collaboration with banks (club deals, senior/mezz splits, warehouse lines). Real estate credit is a major sleeve within that trend.

On the real-estate-specific side, platforms like Blackstone (BREDS) have raised multi-billion-dollar funds and actively originate and acquire loans globally. Others—ACORE, Starwood, KKR, Oaktree, PGIM Real Estate, and more—compete across senior, mezzanine, construction, and structured solutions. PGIM’s 2025 private CRE credit outlook highlights continued opportunity as yields remain elevated and the lender mix evolves.

What terms do private credit funds offer?

Terms vary widely by business plan, leverage, sponsor, and asset quality, but several patterns are common in 2025:

1) Proceeds and structure.

• LTV/LTC: Senior bridge loans commonly size up to ~70–75% of value; combined with mezz or preferred equity, total capitalization can reach the low-80s LTV/LTC for strong sponsors and liquid assets. ACORE, for example, publishes “up to 80–85% LTV” on certain programs (deal/market dependent).
• Future funding: Transitional business plans (lease-up, light capex) often include future-funding facilities for TI/LC and renovations, released against milestones—useful where banks won’t stretch.

2) Pricing.

• Floating-rate base + spread: Most private CRE loans float over SOFR and reset every 30–90 days. Spreads vary by risk; in private middle-market credit broadly, a 500 bps spread over a trough SOFR around ~3.75% still yields high-single-digit coupons—illustrative of the income on offer to lenders and the cost to borrowers. Real-estate spreads can be tighter or wider depending on asset quality and leverage.
• Fees: Expect 1–2% origination plus exit and extension fees; unused line fees on future funding are common. Third-party costs (appraisal, engineering, legal) are standard for speed and structuring.

3) Covenant package.
Private credit is typically more bespoke than bank loans: cash sweeps, DSCR/DY tests, business-plan milestones, and triggers that require additional equity or curtailments. In return, borrowers often get certainty of execution and creative structuring (earn-outs, release prices, partial recourse).

4) Speed and certainty.
Debt funds market 30–60 day closes with internal servicing and decision-making—valuable for time-sensitive acquisitions or expiring maturities (ACORE cites ~30–45 days for some bridge loans).

5) Product menu.

• Senior bridge: Acquire, refinance, or recap transitional assets.
• Construction: Selectively available; often requires strong GC, GMP contracts, and sizable equity.
• Mezzanine debt & preferred equity: Fill gaps between senior proceeds and total cost; more flexibility on control terms and intercreditor.
• Loan acquisitions/assumptions: Funds buy existing loans at discounts or finance note purchases, then work with the sponsor to execute the business plan.

When should developers use private credit?

1) Transitional assets or complex stories. If the plan involves lease-up, re-tenanting, adaptive reuse, or heavy TI/LC, private lenders are often the only ones who’ll size to the business plan versus in-place NOI.

2) Speed, certainty, and bespoke structure. Tight contract timelines, 1031 windows, or maturities that need a quick refinance favor lenders that can commit rapidly and tailor covenants to your plan. Funds with discretionary capital and in-house teams excel here.

3) Construction with execution risk. Banks may require lower leverage, full recourse, and more hoops. Debt funds will price the risk, require completion guarantees, and fund against milestones—often at higher leverage but higher cost.

4) Rescue capital or recapitalizations. For maturing loans where proceeds are short due to cap-rate drift or NOI dips, preferred equity or mezz can bridge the gap to a longer-term solution. With the maturity wall growing into 2025–2027, this is a core use case.

5) Sector rotations. Banks remain cautious on office; private credit can differentiate by sub-type (medical office, life sciences, logistics, data centers) and geography instead of a blanket “no.” PGIM notes geography/asset selection is a key performance driver in the current regime.

What’s the catch? Risks and trade-offs to weigh

Cost of capital. Private credit is typically more expensive than bank debt—higher coupons plus fees. But cost needs to be weighed against certainty of close, time value, and business-plan value creation. If your IRR hinges on capturing a basis-point discount or meeting a hard deadline, the “all-in” economics may still favor a debt fund.

Refinance risk. Floating-rate debt amplifies cash-flow volatility. While forward curves imply lower short rates than peak levels, spreads can widen in risk-off periods. Build DSCR buffers; underwrite interest rate caps thoughtfully. Market commentary in 2025 suggests spreads may stay elevated relative to pre-2022 norms.

Covenant complexity & control. More bespoke deals mean more triggers—cash sweeps at certain DSCR, required paydowns if leasing lags, consent rights on major leases, etc. Read (and model) the covenants like you would your pro forma.

Execution discipline. Private lenders move fast but expect you to hit milestones. Slippage on lease-up or capex can quickly become a liquidity problem. Keep contingency and working capital cushions.

Where private credit is heading (and how to position)

Bank–private credit partnerships are normalizing. Rather than “either/or,” we’re seeing combined capital stacks: bank senior at conservative leverage plus a private mezz or pref from a fund the bank trusts. This lets banks maintain relationships while meeting internal risk limits—and gets developers to a workable proceeds number.

Scale matters. The largest platforms have raised record funds and are buying loan portfolios—giving them proprietary intel, deal flow, and flexibility to price. Blackstone’s recent $8B BREDS V close and loan acquisitions illustrate the flywheel: capital begets opportunities begets performance. Borrowers benefit from that certainty and capacity—especially on larger, multi-state portfolios.

Selectivity, not retreat. Contrary to “credit is closed,” 2025 outlooks from institutional managers suggest that elevated yields and improving real-estate market internals are creating attractive risk-adjusted opportunities for lenders—so long as underwriting is disciplined and asset selection is surgical. Expect continued appetite in apartments, industrial, and specialty (storage, data centers), with targeted tolerance for office where basis and business plan make sense.

A quick developer playbook for using private credit

1. Define the job to be done. Is this a bridge to stabilization, a construction take-out, a maturity refi with a gap, or a recap that needs rescue capital? Your “use of proceeds” drives the right product (senior, mezz, pref).
2. Right-size leverage. Leverage is a tool, not a goal. Model multiple exit cap rates and NOIs; size debt to a conservative DSCR under stressed rates/spreads. Tie future-funding to value creation milestones.
3. Map the covenant triggers. Translate covenants into monthly KPIs: DSCR tests, leasing deadlines, capex timelines, test dates. Treat them like project milestones, not legal fine print.
4. Budget all-in cost. Include fees, interest reserves, extension options, caps/hedges, and contingency. Compare to the cost of missing your window (lost basis, broken 1031, etc.).
5. Pre-plan the takeout. Before you close, identify at least two takeout paths: (A) bank/agency/CMBS at stabilization and (B) a second private facility if timing slips. Keep equity partners aligned on both.
6. Choose partners for fit and flexibility. Bigger isn’t always better—but a platform with experienced asset management, clear intercreditor norms, and genuine closing certainty is worth paying for. ACORE’s published parameters are a helpful benchmark for what institutional debt funds target.
7. Lean into transparency. Provide frequent, data-rich reporting. Debt funds reward sponsors who communicate early—especially if you need waivers or timeline tweaks.

The takeaway

Private credit didn’t just “fill in” for banks—it rewired the CRE financing market to prioritize speed, structure, and sponsor execution over cookie-cutter underwriting. The cost is higher, but for transitional assets, tight timelines, or nuanced stories, debt funds can be the difference between closing a deal and watching it die in committee. With a trillion-dollar maturity wall rolling through 2027 and bank appetite still selective, expect private credit to remain a primary path to capital—especially for sponsors who can articulate a crisp business plan and deliver milestones on time.

Sources

• Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) – lending standards and demand. Federal Reserve+2Federal Reserve+2
• S&P Global Market Intelligence – maturity wall estimates into 2027. S&P Global
• Cred iQ – securitized maturity wall detail (CMBS, agencies, CLOs). CRED iQ
• PitchBook 2024 Global Private Debt Report – fundraising and AUM trends. PitchBook
• PGIM Real Estate, Spotlight on Private Credit 2025 – market outlook and lender mix. pgim.com
• ACORE Capital – published loan parameters/closing timelines. ACORE CAPITAL LP
• Reuters & WSJ – 2025 portfolio loan purchases by Blackstone/BREDS. Reuters+1
• Flat Rock Global – mechanics of SOFR-based private credit coupons. flatrockglobal.com
• NAIOP/Wharton/RER – implications of Basel Endgame on bank risk appetite. NAIOP+2Knowledge at Wharton+2
• Bridge loan cost mechanics (fees/third-party). Private Capital Investors