New originations of multifamily loans by debt funds are currently about 17% of total originations in the space, according to Newmark. This represents an all-time high for the lending group and is more than double the marketshare in late 2019, just before the start of the COVID-19 pandemic. At the same time, new multifamily loan originations by banks are at their lowest level in more than a decade.
Lending Activity by Origination
RCA, Newmark Research as of 10/24/24
While this near-term shift in where real estate investors turn for their financing can be partially ascribed to the hangover from the exuberance in 2021, there is a quiet yet fundamental shift in the way banks are regulated which will have a profound impact on the future of commercial real estate lending. Debt funds are here to stay, and there are three main reasons why:
Need for Flexibility
Multifamily valuations skyrocketed in late 2021 and early 2022, driven by low interest rates and exceptional levels of capital in the system. There was too much money (demand) and not enough investment opportunities (supply), and this imbalance caused values to escalate to levels 20% to 30% or more above historical levels.
Now, multifamily owners and operators are grappling with lower valuations and operational headwinds, and their 2021 and 2022 originated loans are beginning to come due. Some borrowers may be able to refinance with conventional lenders, such as banks or life insurance companies. But most will need higher loan amounts relative to today’s valuations, and more flexibility in structure. Debt funds are designed to thrive in these environments where creative solutions are required.
Tighter Lending Standards
Borrowers are looking for more creative solutions. But government-sponsored agencies such as Freddie Mac and Fannie Mae, along with traditionally conservative banks and life insurance companies, are tightening their lending standards to more historical norms. These institutions are shifting to lower proceed levels and more stringent borrowing requirements, eliminating all but the most institutional real estate borrowers and pushing them to seek alternative solutions.
New Banking Regulations
The Basel Accords are a series of international regulations created out of the aftermath of the Global Financial Crisis. The agreements aim to standardize capital and liquidity requirements for lending institutions across the globe and prevent a repeat of the crisis. Nearly 15 years in the making, the final pieces of Basel III (Finalizing Post-Crisis Reforms, or “Endgame”) are expected to start implementation in the United States in Q3 2025.
Historically, regional and national banks have been the second-largest lenders to multifamily borrowers, occasionally even outpacing the largest lenders—U.S. government-backed Freddie Mac and Fannie Mae. However, with these new regulations in place, banks are disincentivized to originate new real estate loans. Instead, they are electing to partner with debt funds to get their real estate exposure. This provides them with a more protected investment, requiring less cash to be held on their balance sheets as collateral.
Private credit and debt funds are diving eagerly into the new paradigm. While their cost of funds is traditionally higher than banks’, they’re able to make loans with higher proceeds and more innovative structuring. The funds hold onto the riskiest “first loss” position of the loan and sell the more protected, and safer, portion of the loan to the banks at a lower cost.
The multifamily lending environment is evolving rapidly, and debt funds are in a unique position to drive performance over the coming years. They’re able to offer an option to borrowers who need more creative solutions and higher proceeds as they work through an uncertain new era. When these natural forces are combined with a fundamental shift in banking regulations, debt funds are likely to be a staple in the real estate lending space for the foreseeable future.
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