Filling the Real Estate Funding Void

October 30, 2024
Kirloes Gerges
Managing Director, Portfolio Management, Principal Real Estate Debt

A curious thing has happened in the commercial real estate market in recent years. Traditional lenders such as banks and insurance companies have dramatically reined in lending volumes to help ensure their commercial real estate exposure doesn’t jeopardize their liquidity needs. Even in a high-rate environment, traditional lenders, in aggregate, are lending roughly 50% less than they were a few years ago, according to Kirloes Gerges, a real estate portfolio manager at Principal Asset Management. “There’s just less capital being deployed out of these traditional lending buckets,” he says. “While the expectation is for them to make their way back into the system, the speed in which they are willing to ramp up lending is unknown.”

This is creating a unique opportunity for private lenders to step in and fill the gap. And that liquidity gap may be more pronounced in the next few years due to the roughly $2 trillion in commercial real estate loans expected to mature between now and 2026, according to the Mortgage Bankers Association. “It’s a mismatch between supply and demand,” Gerges says. “Demand is coming in the form of refinancing and acquisitions. And with traditional lenders sidelined, private lenders are coming in to meet that demand by deploying capital.”

For investors, private real estate debt can play a variety of roles within their portfolios. It can be part of an investor’s exposure to private credit, fixed income or real estate investments. “It’s versatile enough to be put in any of these buckets,” Gerges says. “It’s not heavily correlated to direct lending or fixed income, and it’s not even heavily correlated to real estate equity. So you’re getting a diversification benefit regardless of where you put it.”

Like all areas of the financial markets, private real estate debt is subject to the ups and downs of interest rates and macroeconomic events. But even if interest rates decline from today’s relatively high levels, Gerges believes that will open the door for an even higher volume of transactions, which in turn will deliver more opportunities for private lenders to deploy capital, effectively expanding the universe of opportunities for investors.

“At this point, I’m not seeing headwinds for this market,” Gerges says. “We think the next several years are going to be good vintage years for real estate debt.”

This content was co-created with WSJ Custom Content, a unit of The Wall Street Journal Advertising Department. The Wall Street Journal news organization was not involved in the creation of this content.

"For more insights around private real estate credit, read the rest of Kirloes' views on Wall Street Journal.

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