The case for commercial real estate debt

In both our annual and our mid-year Inside Real Estate outlooks, we highlighted private debt real estate is one of the most attractive opportunities across the four quadrants. We argued that higher interest rates and elevated debt maturity schedules are creating a favorable environment for lenders. Current pricing remains attractive relative to other risk assets and lending standards are stable. In this report, we dig further into our thesis.

• The U.S. commercial real estate (CRE) mortgage market is $4.8tn. Debt funds have become an increasingly important source of debt capital with market share rising to 13% in 2024 compared to an average of 9% from 2015 to 2019. According to Mortgage Bankers Association as of 1Q 2025, the nearly $2.5tn of loans maturing from 2025 to 2028, of which 40% are held on bank balance sheets, provides an opportunity for alternative lenders to continue to grow share.
• Open-ended CRE debt funds returns are historically attractive. These funds have generated annualized total returns of +7.4% since inception in 1Q14 driven by income returns. Every quarter has generated positive total returns with an average of +1.81% ranging from a minimum of +0.41% (4Q23) to a maximum of 3.51% (1Q16).¹
• The stability of open-ended CRE debt funds is underappreciated. Open-ended debt funds historically offer higher returns than public corporate bonds and core real estate, similar returns to U.S. listed REITs and lower returns relative to the broader public equity markets as well as private corporate credit and private equity, However, openended debt funds have significantly lower volatility resulting in much better Sharpe ratios over the past 10-years. They, therefore, may play an important role in portfolio optimization for investors that are focused on reducing volatility and draw-down risk.
• New originated loans offer attractive risk-adjusted returns. Conservative loan-to-values on property prices that have already reset approximately 20% mitigate against further declines in unlevered property valuations. At the same time, yields are attractive given higher risk-free rates and widening credit spreads. It’s important to remember the CRE mortgages are secured by income-producing real estate. The real estate itself is the collateral. In the event of foreclosure, the lender can take ownership of the property at an attractive basis that may allow for the redevelopment or releasing of the property at compelling returns.
• Attractive vintage returns. There’s historical precedent for high returns in the aftermath of markets like we’ve observed over the past couple of years. While not directly comparable to open-ended CRE debt funds, closed-end debt funds generated median IRRs of +15.6%, +13.2% and +12.7% for the 2009, 2010 and 2011 vintages compared to median IRR that averaged +8.6% for the 2012 to 2022 vintages, according to data from Preqin as of July 2025.

The U.S. CRE debt market presents a compelling opportunity for investors, particularly through open-ended debt funds. With a $4.8 trillion market and nearly $2.5 trillion in maturities coming due between 2025 and 2028—40% of which are held by banks—alternative lenders are well-positioned to gain market share. Open-ended CRE debt funds have delivered consistent and attractive total returns, averaging +7.4% annually since inception, with positive performance in every quarter. These funds offer strong risk-adjusted returns, outperforming public bonds and core real estate on a Sharpe ratio basis due to their low volatility. Today’s lending environment—characterized by conservative loan-to-values, reset property prices, and elevated yields— further enhances the risk-return profile. Historical data also suggests that market dislocations can lead to exceptional vintage returns, as seen in the post-2008 cycle. Altogether, CRE debt represents a stable and underappreciated opportunity for investors seeking income, capital preservation, and diversification.

For more on why we believe private debt real estate is one of the most attractive opportunities across the four quadrants, read our full report.

(1) Source: NCREIF/CREFC - Open-end Debt Fund Aggregate, which is a fund-level aggregate comprising 17 open-end funds, 1Q 2025

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