By Clayton Ross, Director, JLL NY Capital Markets
Commercial real estate capital markets activity was on the rise during 2024, with momentum accelerating in the second half of the year, particularly in the lending markets. From a credit market standpoint, the reduction in borrowing costs at various points of 2024 vs. 2023, and an abundance of debt capital, are leading to a significant increase in lending for commercial real estate, with the Mortgage Bankers Association projecting a 28% increase in loan originations volume for 2025. [1}
According to figures from Real Capital Analytics, between 2022 and the first half of 2024, banks’ share of direct real estate loans in the U.S. decreased from 48% to 31% as banks took a more cautious stance following the regional bank failures in 2023 and the proposed implementation of Basel III Endgame.
During this time, traditional bank lenders began broadening their approach to real estate lending by expanding indirect lending via warehouse lines and note-on-note leverage. This shift enables banks to lend on a senior-most tranche of a real estate loan while a private debt fund lends on a synthetic subordinate position, thereby reducing the bank’s overall credit risk exposure and allowing the bank to classify the loan as a business loan (C&I).
S&P Global projects over $1 trillion in real estate loans maturing annually from 2025 through 2027 [2], approximately half of which were previously issued by banks while they were flush with COVID-era cash. With lender activity today remaining balanced across lender types, and banks now supporting indirectly through C&I-based financing, JLL expects to see a robust amount of refinancing activity across CRE.
Banks’ expanded approach to lending redistributes risk, allowing banks the opportunity to provide warehouse lines and note-on-note financing to private debt funds in lieu of originating the direct financing while still receiving credit exposure to the same real estate collateral they would historically finance. In the case of a potential default, banks will now receive prioritized repayment, thus minimizing potential losses while remaining compliant with regulations like Basel III and Dodd-Frank.
JLL’s Lender Finance Group is actively working with a number of debt funds to structure these warehouse lines, enabling funds to originate and efficiently leverage loans through cheaper bank financing. Recently, JLL advised a West Coast-based debt fund on structuring two credit facilities totaling $850 million in total capacity. The team is also working with our colleagues in JLL’s Miami office to close a $50 million note-on-note financing for a private equity fund originating a new mortgage.
With the elevated volume of CRE loans maturing in 2025, especially in the office and multi-housing sectors, borrowers are likely to see the value of non-traditional financing solutions, like debt funds, which have historically offered higher loan-to-value (LTV) financing. It will allow borrowers to secure more debt proceeds and require less equity for acquisitions or cash-in refinancings. Due to the back-leverage provided via banks, debt funds can afford to push leverage higher on their whole loans, thereby minimizing the borrower’s capital need compared to traditional financing sources. To support the funds initiative, banks are forming new dedicated note-on-note teams to support their private credit clients.
As we progress into 2025, private credit funds, less impacted by regulatory constraints and offering more flexible and higher leverage lending options, will increasingly bridge the current lending gap. More banks are leaning into indirect lending to increase their C&I books, injecting a new cycle of back-end liquidity into the CRE market at a time where existing loans need refinancing, which stands to bring down the average cost of debt capital.
The post How Banks Are Benefiting from the Rise in Private Real Estate Credit appeared first on Connect CRE.
​Â
