The commercial real estate capital markets experienced a strong resurgence in 2024, with momentum picking up significantly in the latter half of the year, particularly in the lending sector. Lower borrowing costs and abundant debt capital have led to a substantial increase in lending activity, setting the stage for an anticipated 28% rise in loan originations in 2025, according to the Mortgage Bankers Association. This evolving landscape is being reshaped by shifting bank strategies and the expanding role of private credit funds.
Between 2022 and mid-2024, banks reduced their direct real estate loan exposure in the U.S. from 48% to 31%. The cautious stance followed the regional bank failures of 2023 and impending Basel III Endgame regulations. To navigate these changes, banks diversified their real estate lending by increasing indirect lending through warehouse lines and note-on-note leverage. This strategy allows banks to focus on senior tranches of loans while private debt funds assume synthetic subordinate positions. By doing so, banks reduce their credit risk while reclassifying loans as commercial and industrial (C&I), maintaining their presence in the real estate market through structured financing.
With over $1 trillion in commercial real estate loans maturing annually from 2025 through 2027, nearly half of which originated from banks flush with COVID-era liquidity, refinancing demand is expected to be substantial. Banks are now strategically engaging in indirect lending, enabling a balanced lender mix that supports market stability. This approach mitigates risk while still allowing banks to gain exposure to real estate collateral through structured debt arrangements.
As banks extend warehouse lines and note-on-note financing to private debt funds, they position themselves for prioritized repayment in potential default scenarios, enhancing compliance with Basel III and Dodd-Frank regulations. JLL’s Lender Finance Group is actively structuring these facilities, recently advising a West Coast-based debt fund on $850 million in credit capacity and collaborating with JLL’s Miami office to secure $50 million in note-on-note financing for a private equity fund’s new mortgage origination.
The influx of maturing commercial real estate loans, particularly in the office and multi-housing sectors, underscores the growing importance of non-traditional financing solutions. Private debt funds, historically offering higher loan-to-value (LTV) financing, provide borrowers with greater leverage and reduced equity requirements for acquisitions and refinancing. With banks supporting back-leverage, debt funds can extend more favourable terms, bridging gaps left by traditional financing sources. In response, banks are forming dedicated note-on-note teams to strengthen their private credit relationships and expand indirect lending initiatives.
As 2025 unfolds, private credit funds will play an increasingly critical role in commercial real estate financing, leveraging their flexibility and regulatory agility to meet growing demand. Banks, in turn, are reinforcing their indirect lending strategies, fueling liquidity at a time when the market requires refinancing solutions. This dynamic shift stands to lower the overall cost of debt capital and sustain commercial real estate’s forward momentum.
Real Estate Credit Investments Limited (LON:RECI) is a closed-end investment company that specialises in European real estate credit markets. Their primary objective is to provide attractive and stable returns to their shareholders, mainly in the form of quarterly dividends, by exposing them to a diversified portfolio of real estate credit investments.
