Why private real estate lending is growing

Private lender activity in commercial real estate (CRE) has rebounded more sharply than the overall market, nearly doubling its pre-pandemic share of loan originations.

What’s driving it?

• Banks are reducing direct CRE lending partly due to Basel III Endgame proposals and liquidity pressures following failures of regional, niche, and community banks. (Basel III Endgame is the last stage of US regulators implementation of reforms meant to ensure the stability of the banking system.) This has pushed banks toward warehouse lines, which provide loan originators with a line of credit to fund mortgages, allowing banks to issue loans without using their own capital, and note-on-note financing, where a lender provides financing that’s secured by an existing loan. They both help banks maintain indirect real estate exposure while lowering risk-weighted capital requirements.
• Private lenders are filling the gap, offering flexible financing that helps banks achieve indirect exposure.

What’s next?

• Property values are stabilizing after 2½ years of declines, signaling more deal activity.
• Equity transactions are rebounding, creating fresh demand for loans.
• A wave of loan maturities — about $1.3 trillion annually through 2029¹ — will drive refinancing needs as older loans become reset at higher interest rates. 

Bottom line

Private real estate lending is playing an increasingly central role in CRE financing. Regulatory reforms have structurally reshaped bank lending behavior, reducing risk appetite and creating space for private lenders. With property values stabilizing, transaction activity rebounding, and a significant wave of loan maturities on the horizon, current market conditions warrant consideration of private real estate lending.

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