As commercial real estate is still finding its footing following the pandemic, the lending landscape continues to shift. Traditional lenders are maintaining a conservative approach, as they balance tight regulations, ongoing liquidity challenges, and sector uncertainty alongside borrowers.

As banks, insurance companies, and other large financial institutions assess their exposure to commercial real estate, private credit providers have complemented the established debt sponsors by offering flexible and efficient solutions to borrowers. With many projections suggesting that over the next five years the global private credit market could triple, borrowers will benefit from a competitive lending marketplace between both traditional and private lenders.

There are several opportunities, risks, and predictions for both borrowers and lenders when considering private credit in U.S. commercial real estate lending in 2025.

Efficiency Creates Opportunity

The lack of regulatory oversight and more structured internal controls allow private lenders to act quickly and nimbly. Fewer committees and administrative scrutiny provide borrowers with increased certainty that their deals will get done as quickly as needed. Private lenders can originate loans, secured by valuable collateral, while offering more flexible terms, albeit higher interest rates, to borrowers compared to more traditional bank loans.

Maturing Loan Environment

Industry experts estimate that approximately $1 trillion in commercial real estate loans are set to mature by the end of 2026. Many of these loans were originated during periods of historically low interest rates, leaving borrowers at an important inflection point as they look to refinance. The rapid rise in interest rates over the last few years has led to the repricing of assets, with existing lenders looking at significantly impacted property valuations now versus when the deal was underwritten. These factors have led to a funding gap that private lenders are uniquely positioned to fill, often on terms that better reflect current market conditions.

While borrowers may look to private credit to originate new loans, many borrowers with quality cash-flowing assets and maturing loans can also negotiate a loan extension with their existing lenders and use private credit as a complementary tool. Borrowers can look to the private market for new subordinate capital. This capital can be used for the additional equity required by the existing lender, can facilitate new interest rate cap purchases, may replenish the interest reserve for the senior loan, or cover other financing closing costs.

Investor Appetite and Borrower Opportunity

Given inflation concerns over the last few years, many investors have stayed on the sidelines and accumulated cash waiting for the right time to deploy it. With the tempering of inflation and a reset in valuations across commercial real estate, private credit lenders see this as an opportunity to achieve higher yields in the real estate market, with loans that can be structured for a relatively short duration. From a borrower’s standpoint, having several potential private lenders with “dry powder” creates a good marketplace to shop around and negotiate terms.

Risks Associated with Private Credit

While the influx of capital from private lenders opens new opportunities, it also introduces additional considerations for both borrowers and lenders. Borrowers may face increased pressure due to higher interest rates, as private credit loans often come with relatively high spreads. With the ongoing uncertainty in valuations, it’s crucial for borrowers to carefully analyze the collateral and assess potential deal and market risks. Should borrowers have issues satisfying debt service, for example, private lenders may be less patient and willing to work with borrowers than traditional lenders.

On the lender side, lower levels of regulatory oversight in private credit can be advantageous, but they also necessitate rigorous due diligence and thorough creditworthiness evaluations to mitigate potential risks. A strong understanding of how a borrower is capitalized for a particular deal is key. Once the loan is closed, the lender will need to remain actively engaged, monitoring covenants and continuing dialogue with borrowers to get ahead of potential issues.

Office and Multifamily Outlook

As we look across real estate sectors, the office market, most notably, is in a state of flux. Driven by evolving work patterns and changing tenant expectations, many legacy office buildings now require significant repositioning. Private credit can serve as a short-term option for borrowers in need of refinancing existing office buildings, an asset class many traditional lenders may be weary of in the current market. Borrowers looking to finance projects that involve necessary capital improvements to drive occupancy, adaptive reuse, modernization, or even conversion to mixed-use developments can lean on private credit as an option while developing creative solutions to inject value into existing office buildings.

Turning to multifamily, the market has seen a construction boom over the last several years, highlighted by more than 580,000 units being completed in the U.S. in 2024 according to Colliers, the most since 1974. With a significant number of construction loans maturing, there is an opportunity for private capital to step in as a financing source, particularly as developers continue to lease up completed projects, which in turn leads to stabilization and greater potential to refinance the asset with a traditional lender.

Interest Rate Environment

With recent news suggesting that the Federal Reserve may not cut rates as many times as previously expected in 2025, rates are likely to remain higher than in the last market cycle. Traditional lenders are more likely to wait out additional rate cuts before redeploying capital, creating an ideal environment for private credit lenders to invest in cash flowing assets, capitalizing on trillions in maturing loans and a reset in valuations.

Conclusion and Key Takeaways

Private credit is poised to play a big role in the commercial lending space over the next five years, creating a favorable market for borrowers. These key factors will drive that opportunity as we move through the next real estate cycle:

• Approximately $1 trillion in commercial real estate loans are set to mature by the end of 2026, creating significant demand for refinancing options at a time when higher interest rates have impacted property valuations.
• Private credit can serve as complementary capital for borrowers with quality assets who secure loan extensions from their existing lenders, providing funds for additional equity requirements or other financing needs.
• The office market presents unique opportunities for private lenders as traditional lenders scale back investment in this sector.
• With the Federal Reserve calling for fewer interest rate cuts in 2025, private credit lenders are well-positioned to capitalize on higher yields while traditional lenders remain conservative.

Courtney Mayster is the Managing Partner at Much Shelist, P.C. and a seasoned commercial real estate attorney with projects ranging from acquisitions and dispositions to financings and developments. Ian Shaffer is an associate at Much who counsels buyers, sellers, investors, landlords, tenants, and lending institutions on commercial transactions.