The commercial real estate lending world is going through big changes. Banks and traditional lenders used to lead, however this has now changed. Private credit funds and other non-bank lenders are taking over. Why? They offer more flexible, creative, and faster financing options.

It should be noted that this shift is not just a short-term trend. It’s a major change driven by new market conditions, tighter regulations, and changing borrower needs.

Let us break down why private credit is replacing traditional CRE lending, the main reasons behind the shift, and what it means for borrowers, investors, and the real estate market overall.

Private credit means loans and financing provided by non-bank lenders like private equity firms, hedge funds, insurance companies, and credit-focused investment funds. These lenders aren’t part of the traditional banking system, so they’re not bound by the same strict regulations. That offers them the freedom to offer more flexible and tailored loan options.

Key Features of Private Credit:

• Direct lending: No banks or middlemen involved
• Flexible loan types: Includes mezzanine loans, bridge loans, construction financing, and more
• Higher risk appetite: Willing to lend in situations banks might avoid
• Faster process: Quick approvals and faster access to funds

Why Is Private Credit Gaining Ground in CRE Lending?

1. Regulatory Pressure on Banks: Since the 2008 financial crisis, banks have faced tougher rules and stricter lending standards. Lately, worries about commercial real estate (especially office and retail spaces) have made banks even more cautious. As a result, getting a loan from a bank has become harder and more expensive. The consequence has been the following:
2. Lower LTV ratios: Banks are lending less money relative to property value
3. Higher rates and fees: Borrowers are paying more
4. Slower approvals: The loan process takes longer
5. Less appetite for risk: Banks avoid transitional or value-add real estate projects
6. Market Volatility, Rising Interest Rates: Since the pandemic, the commercial real estate market has faced rising interest rates, growing uncertainty, and falling property values in certain sectors. Traditional lenders have become more cautious, especially when it comes to higher-risk projects. In contrast, private credit lenders see this volatility as an opportunity. They’re willing to step in and finance deals that banks are now avoiding, helping keep projects moving even in uncertain times.
7. Borrowers Want Speed and Flexibility: Today’s real estate developers and investors need to move fast. In a competitive market, quick closings can make or break a deal. They also need flexible financing for complex projects like mixed-use buildings or repositioning older properties. Banks often can’t meet these demands, especially when higher leverage is required. Private credit lenders are built for speed and customization, often closing deals in a matter of weeks rather than months.
8. Investors Are Looking for Better Returns: With traditional investments like bonds offering lower yields, big investors (such as pension funds, insurance companies, and endowments) are putting more money into private credit. This growing pool of capital allows private lenders to fund larger real estate deals and offer attractive terms. Isn't it a win-win? Investors get higher returns, and borrowers get the financing they need.

Key Trends Accelerating Private Credit’s Rise in CRE-

1. Private Credit Is Growing Fast: Private credit is expanding at a rapid pace. According to Preqin, private credit assets under management reached over $1.7 trillion globally in 2023. In the U.S., private credit’s share of CRE lending has doubled in just the last five years. This shows a clear shift as more borrowers turn to private lenders and more investors pour money into the space.
2. Moving Beyond Transitional Assets: Private credit is no longer just for risky or transitional deals. Today, private lenders are financing a wider range of commercial real estate projects. This includes stable core and core-plus assets, large construction projects, portfolio acquisitions, and even distressed asset workouts. The ability to serve all types of projects makes private credit a more mainstream option.
3. Smarter Lending with Tech and Data: Private credit funds are using advanced technology to improve how they lend. They rely on data analytics to assess risk more accurately, use automated platforms to speed up loan origination, and work with proptech companies to streamline due diligence. This use of technology helps them make faster, better-informed lending decisions.
4. Teaming Up with Banks: Interestingly, some banks are now partnering with private credit funds. These partnerships allow banks to share risk or offload parts of their loan portfolios. It’s another sign that the lines between traditional and alternative lending are becoming increasingly blurred, and that private credit is becoming a key player in the CRE financing ecosystem.

How Private Credit Benefits Borrowers and Investors?

Private credit offers major advantages for both borrowers and investors in the CRE space.

• For borrowers, private lenders can close deals much faster—often in 30 days or less. They also provide higher leverage, sometimes going up to 80% loan-to-value (LTV), which banks typically won’t offer. Beyond speed and size, private credit allows for more creative financing structures, like payment-in-kind (PIK) interest, preferred equity, or hybrid debt. Most importantly, private lenders are more willing to finance transitional, value-add, or non-stabilized assets that traditional banks often shy away from.
• For investors, private credit delivers strong risk-adjusted returns, often in the 8% to 12% range or even higher. It also offers a way to diversify away from public markets, which can be more volatile. And because these loans are usually backed by real assets, investors gain downside protection through collateralized lending—making it a compelling investment in uncertain times.

Challenges and Risks of Private Credit in CRE

While private credit offers many benefits, it also comes with some important risks. Because these lenders operate outside the traditional banking system, there’s often less regulatory oversight, and that can lead to less transparency. Higher leverage can also raise the risk of borrower default, especially if property values drop. For investors, private credit investments are less liquid, meaning they can’t be easily sold or traded if cash is needed quickly. These risks highlight the importance of thorough research and due diligence.

The growth of private credit in commercial real estate isn’t just a passing trend; it’s a long-term shift. With banks staying cautious and the CRE market evolving, private lenders are stepping in to fill the gap. They’re becoming a key part of the financing ecosystem, offering faster, more flexible funding. For borrowers, this means more financing choices. For investors, it opens up new ways to earn strong returns, but it also calls for smart, careful investment decisions.