Real estate credit’s consistency shines in a turbulent market
Why real asset lending is built for today’s environment
Key Takeaways
- Heightened volatility and adverse headlines in credit markets reinforce the importance of downside protection, particularly in strategies backed by hard-asset collateral.
- At the same time, recent guidance from the Federal Reserve, OCC, and FDIC reflects growing regulatory support for bank lending to lower-leverage, asset-backed sectors.
- Against this backdrop, real estate credit stands apart: among its fixed income alternatives, it has exhibited the lowest historical correlation to corporate direct lending, offering compelling portfolio diversification without sacrificing returns.
- This dynamic is reinforced by real estate valuations resetting (~18% below 2022 levels)1 ,with recovery already underway (six consecutive quarters of NFI-ODCE gains), supporting new lending opportunities.
Recovery is on display in the secured real estate credit market, with renewed liquidity boosting overall transaction volumes across all sectors of the market. Yet much of the investor conversation remains focused elsewhere.
The current private credit narrative has been shaped by rising defaults in corporate direct-lending strategies, specifically around software companies and the potential loss severities for “asset light” business models. And while there are valid concerns in certain segments of the market, the growing noise is obscuring a critical distinction: Not all private credit is the same.
While direct lending makes up the bulk of private credit, a growing slice of the market features sectors such as real estate that, for example, offers a different risk-return profile to corporate lending and is often complementary to more traditional strategies.
One year ago, we published our perspective on building private real estate credit portfolios, grounded in the fundamental principles that define the asset class and its role within a diversified allocation. As we reflect on those themes today, they remain not only intact, but increasingly relevant.
In fact, the current turbulence highlights the importance of downside mitigation from credit backed by hard-asset collateral, making it a compelling moment for investors to allocate capital to real estate credit.
Private real estate credit averages a -0.1 correlation to fixed income alternatives (see Figure 1), comparing favorably to direct lending and high yield corporate credit, which exhibit correlations of 0.3 and 0.6, respectively underscoring its role as an effective portfolio diversifier without compromising returns. This diversification benefit is particularly timely, as the sector has emerged from a significant valuation reset and is in a rebound phase.
Figure 1: Low Correlation to Fixed Income Alternatives Enhances Diversification
Source. See endnote 2.
It’s worth noting that the real estate recovery is not expected to be uniform across markets or sectors. And values, while beginning to rebound, remain well below recent peaks. As a result, entry points remain attractive relative to both historical and current valuations. That said, equity cushions remain narrow as real estate continues its rebound, while geopolitical turmoil has also once again raised the specter of a potentially higher interest rate and cap rate environment.
With this complex backdrop, investment outcomes will increasingly depend on where you lend in the capital structure and how you underwrite the debt, reinforcing the need to be selective with where capital is deployed. These conditions favor managers that can negotiate the appropriate covenants and controls, stress test capital structures and lend at appropriate attachment points, and underwrite the resilience of cash flows even in a backdrop where interest rates rise.
Significant Scale, Strong Structural Edge
In the U.S. alone, the commercial mortgage market is approximately $6 trillion,3 materially larger than the roughly $2 trillion private credit market.4 As alternative lenders continue to expand their footprint, the investable universe for private real estate credit has grown in tandem.
Beyond sheer size, private real estate credit differs meaningfully in structure and risk profile. Corporate direct lending strategies are typically dependent on borrower cash flow and earnings, where the performance of a single company can dictate loan outcomes. These exposures tend to be inherently cyclical and have come under increasing pressure in a higher-rate environment.
By contrast, private real estate credit is backed by hard asset collateral. Loan performance is supported not only by income generation, but also by underlying property value. Moreover, collateral such as multifamily buildings, logistics portfolios, retail centers and office properties are generally backed by diversified tenant bases, with rent streams derived from multiple sources.
This structural diversification can further mitigate income volatility. Even in downside scenarios where cash flow falls short of debt service, the underlying asset can often provide options for recovery via replacement tenancy or sale. That can translate to much lower losses in the case of a default. And, from a cash flow perspective, rent obligations are typically treated as senior operating expenses, paid ahead of corporate debt service, effectively elevating real estate credit in the repayment waterfall.
These structural advantages are further reinforced by favorable fundamentals in key property sectors. Areas such as multifamily, student housing, senior living and logistics continue to benefit from supply-demand imbalances driven by housing affordability constraints, demographic tailwinds, evolving supply chains and elevated replacement costs.
Income Resilience Over the Long Term
A credit investor’s total return is driven by both current income and principal repayment—earning a steady stream of coupon payments while ultimately relying on the return of capital through a refinancing or asset sale.
Private real estate credit has historically exhibited low loss ratios (approximately 0.3% over the past decade) relative to other forms of private credit, reflecting the dual benefit of hard asset collateral, and typically either contracted or highly predictable revenues. This also compares favorably to corporate credit in a high interest-rate environment, with losses averaging 0.6% from 2022 onwards for real estate private real estate credit and 1.6% for corporate lending.5 More recently, performance has continued to improve, with loss rates declining by nearly 30 bps over the past year (see Figure 2), an important signal of the market’s ongoing recovery.
Trends in CRE CLOs, an indicative and publicly reported subset of the broader commercial real estate debt market, further reinforce this strengthening backdrop. The share of loans in special servicing has declined to 5.6% as of February 2026, down from 9.1% a year prior, while delinquencies have fallen to 4.4% from 6.6% over the same period (see Figure 3).6
Figure 2: Commercial Real Estate vs. Corporate Lending Charge Off Rates
Source: St. Louis Fred (CORBLACBS) and (CORCREXFACBS), as of February 2026.
Figure 3: Real Estate Credit Delinquencies Well Off the Highs of the Past Couple of Years
Source: JPMorgan CRE CLO Databook: February 2026.
Improving credit performance has coincided with a meaningful return of liquidity to real estate markets, as evidenced by a resurgence in CMBS single-asset single-borrower (SASB) issuance. This matters because stronger and more stable cash flows not only support ongoing debt service, but also enhance refinancing prospects. In today’s market, 84% of loans maturing over the next two years in the apartment, industrial, and lodging sectors are refinanceable without additional sponsor equity, and more than half of those could support cash-out refinancing (see Figure 4).
Figure 4: Recovery in Motion as a Strong Refinancing Backdrop Emerges
The percentage of maturing real estate loans that can be refinanced with cash is on the rise
Source: GreenStreet, as of January 2026.
It’s important to note that the structural advantages in real estate credit have not come at the expense of returns: Private real estate credit has consistently delivered among the highest yields across private credit and alternative fixed income strategies over the past decade (see Figure 5).
This distinction is particularly important in the current environment. When we looked back at this same data from last year, the trendline for real estate has only improved: High-yield private real estate credit delivered a 140 bps year-over-year increase in trailing 12-months income yield while corporate direct lending saw a 120 bps reduction over this same period.7
Figure 5: Examining Income Yields, Private Real Estate Credit Has Been a Top Performer for a Decade
Source: See endnote 8.
What’s New: The Evolution of Bank Participation
Banks have historically represented approximately 40–50% of commercial real estate lending in the U.S., and an even greater share in many international markets. Recent guidance from the Federal Reserve, OCC and FDIC on bank capital requirements signals a growing willingness among U.S. regulators to support increased lending into sectors defined by lower leverage and durable collateral.
At a high level, the changes effectively reduce the amount of capital banks in the U.S. must hold against many assets, including residential mortgages, commercial real estate, corporate loans and securitizations. The proposal is designed to improve capital efficiency and encourage greater credit formation, specifically targeted toward high quality, lower risk segments of the market.
Figure 6: Proposed Risk-Based Capital Requirements for CRE loans
Source: BofA Global Research: Fed Proposal on Regulatory Capital for Banks – Impact on Securitized Products, March 2026.
In our view, this policy shift is a validation of real estate credit’s resilience and quality, a constructive signal that real estate has moved through a period of stress and is once again positioned to attract institutional capital at scale.
Still, for private real estate investors, the implications are more nuanced than an increase in competition. While banks are likely to increase their direct participation in the market, the new framework incentivizes them to concentrate on low-LTV, stabilized assets where capital charges would become more favorable.
As a result, private lenders remain structurally positioned to provide credit that banks are still disincentivized to serve. Rather than displacing private real estate credit, the regulatory shift reinforces its role within the broader mortgage market alongside regulated banks, making it a more specialized and, in many cases, more differentiated source of risk-adjusted returns.
With banks competing in a narrow band, opportunity persists in real estate credit even as bank capital returns.
Reset to Stronger Footing
In our view, the current headlines, which are focused on direct lending, do not reflect broad-based risks across credit markets, but rather an increasing dispersion of outcomes. For investors, the opportunity lies not in choosing one strategy over another, but in understanding the structural differences across credit approaches, the relative value between different types of private credit, and positioning their portfolios accordingly.
Importantly, the recovery in real estate credit is not occurring at the margins. It reflects a sector that has reset, repriced, and reestablished discipline following the dislocation of 2022–2024. Improving loan performance and stabilizing credit metrics are not simply cyclical; they are indicative of a market that has absorbed stress and emerged on fundamentally stronger footing.
Within this context, private real estate credit stands out for its differentiated risk profile, asset-backed downside protection, and low correlation to other fixed income alternatives. As such, it can serve as a complement to corporate credit, enhancing diversification without sacrificing returns, while also providing exposure to a segment of the market that is entering the next phase of the cycle from a position of strength.
Endnotes
1. Green Street, as of February 2026.
2. 10 Year timeframe CY 2016 – 2025. RE Credit = Gilberto Levy 2 High Yield Real Estate Debt Index (excludes residential mortgages), Dir. Lending = Cliffwater Direct Lending Index (CDLI), Inv. Grade = Bloomberg U.S. Agg Bond Index, CMBS = Bloomberg US CMBS Investment Grade Index, High Yield = Bloomberg U.S. Corporate High Yield Index, Lev. Loans = Morningstar LSTA US Levered Loan Index, Treasuries = Bloomberg U.S. Intermediate Treasury Index. “Fixed income alternatives” correlation represents performance correlation to all other alternatives listed.
3. Trepp, as of October 2025.
4. Preqin, as of June 2025.
5. St. Louis Fred, as of February 2026.
6. Green Street, February 2026.
7. Giliberto-Levy, Cliffwater, as of December 30, 2025.
8. 10 Year timeframe CY 2016 – CY 2025. RE Credit High Yield = Giliberto Levy 2 High Yield Real Estate Debt Index, RE Credit Senior = Giliberto-Levy Commercial Mortgage Performance Index (G-L 1), Dir. Lending = Cliffwater Direct Lending Index (CDLI), High Yield = Bloomberg U.S. Corporate High Yield Index, Lev. Loans = Morningstar LSTA US Levered Loan Index, Core RE Equity = NCREIF Property Index (NPI), CMBS = Bloomberg US CMBS Investment Grade Index, Inv. Grade = Bloomberg U.S. Agg Bond Index, Treasuries = Bloomberg U.S. Intermediate Treasury Index, S&P 500= S&P 500 Dividend Yield.
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