The Private Credit Opportunity 

Key Takeaways

Ultimately, private credit opportunities boil down to these factors:

1. The CRE private credit market in 2025 offers a promising avenue for investors seeking yield, diversification, and asset-backed securities. For investors who smartly navigate these opportunities, the potential rewards are substantial

2. Deal flow: Evaluating the uniqueness and quality of the debt fund’s opportunities. A steady pipeline of well-structured deals is crucial for the fund’s success. The cost of capital, reflected in the interest rate, must align with the strategy and potential returns of the investment opportunity.

3.Capitalization & Underwriting: Properly capitalizing an organization with capital (equity) and debt from banks. Most private capital providers need a proper balance. Robust underwriting/asset management (execution) is essential to assessing risks and returns.

The commercial real estate private credit market in 2025 is poised for significant growth. As banks continue to tighten lending, there is a promising gap where private lenders can step in. The chart below shows the current participants and size of the CRE debt outstanding.

McKinsey & Company predicts that an additional $5 to $6 trillion of assets could shift into the nonbank ecosystem over the next decade. According to a recent Commercial Mortgage Alert article, bridge lenders are prepping for a “big year”. CMA’s seventh annual survey of nonbank bridge managers had a record number of respondents – 205 – who projected that their combined volume of originations will exceed $250 billion in 2025.

Institutional investors are increasingly attracted to private credit because of its superior risk-adjusted returns compared to equity investments. CRE private credit also offers a unique way to diversify an investment portfolio with potentially high, consistent returns backed by real assets.

Why Now?

We predict that the high-interest rate environment driven by inflation control measures will persist into 2025. According to MarketWatch research, the rate on the 30-year fixed mortgage, for example, will not go below 6.2% next year.

Additionally, regulatory reforms in banking (stricter capital requirements, tax law changes) are also restricting traditional lenders, opening opportunities for private credit funds. Larger traditional lenders would rather make corporate loans – offer warehouse facilities (help the private credit lender finance their loans) than make CRE loans directly to borrowers. Banks receive more favorable regulatory and capital treatment for these types of warehouse facilities and make a better risk adjusted return than making direct real estate loans.

Real estate has shown remarkable resilience in the market – and the outlook for commercial real estate, which has historically outperformed the stock market, is optimistic. In a recent Deloitte & Touche LLP survey, about 88% of the 880 CRE executives surveyed said that they expect their companies’ revenues to increase in 2025.

Well-chosen commercial properties, especially in high-demand sectors like multifamily housing or logistics, continue to perform well. Multifamily households reached a record high this year, accounting for nearly half of rental households. Rental housing demand is expected to remain strong due to housing affordability challenges caused by high interest rates. Additionally, housing construction is expected to slow in 2025, increasing rental demand further. Investors can target opportunities in multifamily housing by providing short-term financing for new constructions or renovations.

E-commerce continues to drive demand for industrial properties (warehouses and last-mile distribution centers). These properties are attractive investments because of their stable cash flow potential and low maintenance. Online retail sales are expected to increase to $1.3 trillion by 2025 (up from $875 billion in 2022), resulting in an increase in demand for more warehouse space.

Key Investment Strategies

1. Target Asset Classes: Investors should focus on stabilized assets (i.e. industrial, multi-family, office spaces) with strong cash flows to cover higher borrowing costs and distressed assets that may need refinancing or renovation.
2. Target Sectors: The healthcare sector, including senior housing and medical office buildings, remains a relatively safe bet for stable cash flow because of aging demographics. As travel and tourism rebound, hospitality projects and mixed-use developments in prime tourist locations are also attractive targets for private credit. Domestic travel and tourism are set to exceed pre-pandemic levels in 2025.
3. Geographic Opportunities: Tech-heavy cities may not be strong investments because of layoffs or remote work effects. Sun Belt cities (Austin, Dallas, Houston, Nashville, Phoenix, Charlotte, Tampa, Miami, Orlando, and Atlanta), however, are seeing population growth and economic stability because of migration from other cities. Dallas ranks as the top real estate market for 2025, according to CRE Daily, but the Southeast U.S. region also offers a favorable tax environment and is seeing high growth in logistics and e-commerce-related industries.

What to Consider

Continuing hybrid work trends mean the office market can be volatile. While some office spaces, especially in urban centers, are struggling, there may be opportunities for private credit investors to finance redevelopment or repositioning efforts.

Don’t count the office sector out yet – according to recent data by Deloitte, on average across the 20 largest metropolitan areas in the United States, an office property purchased five years ago is still valued 15% higher today than it was at the time of acquisition.

Investors should have a long-term value mindset/strategy. The potential for long-term capital appreciation will be key to success in the CRE private credit space. Additionally, a flexible approach, including short-term loans, structured equity, and hybrid deals, may provide a competitive edge as market conditions shift.

The CRE private credit market in 2025 presents a strong opportunity for investors who want the stability of asset-backed securities, as assets shift into nonbank systems.