Real Estate Credit: Why Our Pipeline is at Record Highs Despite Volatility

Despite the market volatility, we are seeing abundant opportunities in real estate credit and expect the pipeline to remain elevated.

From an investment standpoint, we think several aspects of today’s market environment make this vintage of real estate credit particularly attractive. Many people use credit in their portfolios as a source of downside protection, and we think this vintage is positioned relatively well for that purpose. Property values have reset materially over the past few years, providing both buyers and lenders with what we view as attractive entry points. Construction activity has been muted in many sectors and markets as well, which should create a favorable supply/demand dynamic. From a return perspective, yields are expected to remain elevated in a higher-for-longer interest rate environment.

To be clear, however, we see private real estate credit as a long-term investment opportunity. The largest lenders in the market, U.S. commercial banks, have decreased their overall exposure, creating a significant void for alternative lenders to fill. Due to more efficient capital treatment, U.S. commercial banks are shifting their activity from direct origination to lending to other lenders through warehouse and loan-on-loan facilities. Less competition for loans typically results in more attractive terms for lenders. From a risk perspective, lending on real asset collateral can offer both diversification and a potential inflation hedge in a portfolio. Meanwhile, the defensive nature of credit, given the significant equity cushion that absorbs first losses if conditions turn challenging, creates a durable secular opportunity.

Here's how we see the market for real estate lending today.

Significant Opportunity to Lend on High-Quality, Well-Located Properties at Attractive Yields

Going into 2025, we expected the number of real estate lending opportunities to continue growing — and so far, they have. Our global lending pipeline has hit a high-water mark twice so far this year. The first time, in February 2025, the volume came from a combination of a heavy wave of refinancings, as loans originated to finance acquisitions during the post-COVID boom came due (the so-called maturity wall shown in Exhibit 1), and an increase in transaction activity.

EXHIBIT 1: Maturity Wall

We had expected transaction activity to continue accelerating, but in April 2025, “Liberation Day” brought an unexpected new set of opportunities that bumped our pipeline up to $42 billion for the first time ever.

Tariff-related volatility caused whole loan spreads to widen, SASB CMBS issuance to effectively cease, and many real estate lenders to pause on pricing risk, opting to wait for more clarity before quoting new investments. We moved quickly to provide alternatives to borrowers who found themselves unable to execute in the SASB CMBS market. We have been focused specifically on larger loans (often greater than $400 million) that are low leverage and secured by high-quality, well-located assets within secular growth sectors (such as multifamily), and owned by well-capitalized, institutional borrowers.

There are only so many scaled private real estate lenders that can provide very large loans that normally gravitate toward the capital or syndicated market. Lenders with pools of capital large enough to handle these loans can often receive a premium for providing liquidity across all periods, but particularly so during heightened market volatility – an attractive proposition given the quality of the underlying real estate and sponsorship.

Moving Forward in a Heightened Risk Environment

In the weeks since Liberation Day, markets have begun to stabilize, and spreads for high-quality credit have tightened from their widest levels (Exhibit 2) as lenders, who initially stopped pricing risk due to uncertainty, have begun to originate loans again. However, lenders have become more conservative, favoring the sectors seen as most defensive and a narrower set of borrowers. They are also focused on opportunities with more stabilized business plans while lending at lower leverage levels. Furthermore, the CMBS market, while open, is recovering  slower. As such, we are proactively pursuing opportunities to fill liquidity gaps and action our record pipeline.

EXHIBIT 2: CMBS Pricing

We expect the cost of capital to vary more significantly across the risk spectrum going forward, with opportunities to earn a premium for taking calculated risks, such as lending on high-quality properties in strong sectors and attractive locations where leasing isn’t fully complete. In this environment, we think lenders with access to a wide variety of capital pools and deep borrower relationships are at an advantage, as they have the ability to view pricing across the risk reward spectrum and potentially capitalize on a larger number of opportunities.

In our own business, we benefit from the real-time perspective on the property market that our integrated debt and equity platform affords, as well as the views of our investment colleagues in other asset classes, our Public Policy team, and our Global Macro & Asset Allocation team. Given all the information coming in about the risks and potential outcomes of the current market volatility, we have adjusted our underwriting assumptions to be more conservative. That means focusing on the segments in which we have the most conviction, including multifamily and industrial properties, looking for high-quality borrowers, and being mindful of leverage. We have set an even higher bar for lending in cyclical sectors such as hospitality, as well as in markets that are exposed to global trade — port cities that process cargo from China, for example. Finally, we are leveraging deep relationships with borrowers, ensuring that we can be positioned to act as a trusted liquidity provider across a range of market environments, and leaning into our financing relationships to source efficient back leverage.

Why Real Estate Credit?

As mentioned, we think the defensive characteristics, attractive current income, hard asset backing, and significant opportunity set available in real estate credit mean the asset class can play a beneficial role in portfolios.

Investing in real estate opens access to a huge and varied set of opportunities that has only expanded in the most recent bout of market volatility. The U.S. private real estate credit market alone is estimated at some $4.8 trillion, according to the Mortgage Bankers Association, which is just 4% less than the U.S. investment grade corporate bond market excluding financials (Exhibit 3).

EXHIBIT 3: Debt Outstanding in Various Credit Markets

Real estate credit has important defensive characteristics, too. We typically lend at 60%-70% loan-to-value (LTV) ratios, which provides a large equity cushion able to absorb losses in the event conditions become challenging for a particular sector or property. The “value” portion of LTV has declined materially over the past few years as real estate, unlike most other asset classes, has re-priced in response to rising interest rates. Infact, most real estate is currently trading at or below replacement cost. Prices are starting to recover, but real estate credit investors can still take advantage of defensive entry points (Exhibits 4 and 5). Further, we think the limited supply of many types of properties compared to the demand for them should support asset values going forward. Construction pipelines were already down materially when tariffs hit due to sharp increases in the cost of financing, as well as labor and materials in both Europe and the United States. In Europe, strict planning regimes have also thwarted new construction. Constraints on new building should benefit existing assets, particularly in sectors and markets with high demand.

EXHIBIT 4: Real Estate Valuations Remain Significantly Below Historical Valuations

EXHIBIT 5: Commercial Property Price Index (CPI)

Real estate credit also provides attractive income, a trend that seems poised to continue given the higher-for-longer interest rate environment, while hard asset backing and predominantly floating-rate loans can potentially mitigate the erosive effects of rising inflation and interest rates. Another inflation mitigator: Historically, properties tend to appreciate over time, and rents reset regularly to reflect prevailing market rates. Finally, real estate credit can also act as a diversifier, whether juxtaposed against real estate equity, publicly traded bonds, or private loans to corporations.

As for activity going forward, we expect demand for real estate lending to remain robust. Refinancing should continue to be a strong trend. Borrowers who took out loans when interest rates were low in the pandemic years are still facing maturities in a higher-rate environment on properties that have lost value. These owners have a pressing need to either sell or refinance. Lenders that have solid relationships with borrowers, access to scaled and varied capital, and a strong reputation should have plenty of opportunities going forward, even if the economy slows.

Conclusion

It is critical for lenders to be selective and cautious in the current environment. But while market volatility always creates challenges, it can also create opportunities. We are proactively seeking to take advantage of liquidity disruptions and looking for opportunities that can provide attractive absolute, relative, and risk-adjusted returns. We expect that demand for real estate credit will remain high, but that competition will likely intensify in the highest-quality, lowest-risk deals.

From an investor’s perspective, we think real estate credit may help mitigate inflation risk through exposure to collateral-based cash flows, offers the security of a significant equity cushion, and provides elevated current income. Unlike most asset classes, real estate property values have already reset significantly, creating opportunities to lend on high-quality properties at a significant discount to replacement cost. Meanwhile, supply is tight in many sectors, which should help preserve the value of existing assets in strategic sectors and locations. We are watching the market closely, but we expect to be busy in 2025.