Debt Funds Surge as Traditional Lenders Retreat in CRE
By Majid Radaei, RadCRE · · Industry Insights
Private credit lenders, including debt funds, are stepping into the void left by traditional banks, now commanding over 50% of commercial real estate financing in certain sectors, offering crucial liquidity amidst rising interest rates.
Debt Funds and Private Credit: A Growing Dominance in CRE Finance
The commercial real estate (CRE) financing landscape continues its secular shift, with debt funds and private credit lenders increasingly filling the void left by traditional banks. This trend, accelerated by regulatory pressures and higher interest rates, signals a fundamental re-rating of risk and liquidity within the market. According to recent reports, non-bank lenders now account for a significant and growing share of new CRE loan originations, particularly in transitional and value-add assets.
Traditional banks, facing stricter capital requirements and concerns over potential loan defaults, have significantly curtailed their CRE lending activities. The Mortgage Bankers Association (MBA) reported a year-over-year decrease in commercial and multifamily mortgage originations by banks in Q4 2025, while debt funds and other non-bank lenders demonstrated increased activity. This retreat allowed private credit firms such as Starwood Property Trust, Blackstone Mortgage Trust, and Oaktree Capital Management to expand their market share, often providing financing for projects and acquisitions that banks are hesitant to touch.
Navigating Higher Rates and Stricter Underwriting
The prevailing high-interest-rate environment, characterized by SOFR hovering around 4.31% and the Prime Rate at 8.50%, has made traditional bank financing less attractive and often more restrictive. Debt funds, by contrast, offer more flexible terms, albeit at a higher cost. Bridge loans from private credit sources typically price at SOFR + 300-600 basis points, with mezzanine debt often ranging from 12-18%. These higher-cost, more flexible capital solutions have become critical for borrowers seeking to acquire or recapitalize properties in a turbulent market.
Recent transactions exemplify this trend. For instance, in late 2025, Ares Management provided a significant bridge loan facility for a large industrial portfolio acquisition in the Southwestern U.S., a deal that traditional lenders might have shied away from given the current market volatility. Similarly, Brookfield Asset Management's credit arm has been active in providing bespoke financing solutions for various property types, including office-to-residential conversions, which require specialized underwriting and a higher tolerance for transitional risk.
Targeting Opportunities: Distressed and Value-Add Assets
Debt funds are particularly well-suited to finance distressed assets and value-add plays, where bank appetite is minimal. Their ability to underwrite complex situations, deploy capital quickly, and implement creative debt structures has made them the preferred partners for sponsors looking to capitalize on market dislocations. While CMBS spreads have stabilized somewhat at T + 150-300 basis points for prime assets, debt funds offer a crucial alternative for properties that don't fit the rigid CMBS box or require a shorter-term, more actively managed capital solution.
RadCRE Perspective
"The expansion of debt funds isn't just a cyclical response to tight bank lending; it's a structural shift in CRE finance," observes Majid Radaei, Founder of RAD Commercial Realty. "We're past the point where private credit is just a last resort. For many of our clients, especially in hospitality and value-add multifamily, debt funds are now the primary capital source for bridge and transitional debt. Banks are still a critical part of the capital stack for stabilized assets, particularly agency lenders for multifamily or SBA for owner-occupied hotels. But for anything requiring significant business plan execution, a debt fund's ability to offer higher leverage and covenant flexibility—at a cost, of course—is indispensable. We're consistently seeing sophisticated sponsors gravitate towards these solutions, understanding that the incremental cost of capital is often worth it for the speed and certainty of execution. The key is knowing which fund is genuinely active in your asset class and risk profile; not all debt funds are created equal. We've recently structured several financings where debt funds offered 70-75% LTC on hotel acquisitions where traditional banks were capped at 55-60%, showcasing their willingness to lean in on strong business plans."
The Outlook for Private Credit in CRE
Looking ahead, debt funds and private credit are expected to maintain their prominent role in CRE financing. As trillions of dollars in CRE debt mature over the next few years, much of it originated during a lower-rate environment, the demand for flexible refinancing options will only increase. This creates a fertile ground for debt funds to continue growing their market share, solidifying their position as a permanent fixture in the commercial real estate capital markets.
Tags: commercial real estate financing, debt funds, private credit, CRE capital markets, bridge lending, SOFR, distressed assets, value-add acquisitions
Sources: Mortgage Bankers Association (MBA), GlobeSt.com, Commercial Observer, CoStar, Ares Management quarterly reports, Brookfield Asset Management investor relations