Private credit did not adjust for middle market CRE. The count was delayed
Over the past few years, private equity has been portrayed as a lifeline for real estate. As banks tightened under regulatory pressure and rising rates, credit funds stepped in and kept transactions going. According to the Mortgage Bankers Association, private equity funds accounted for about 24% of US CRE lending volume last year, above their 10-year average of 14%.
For middle-market borrowers, that amount was significant. Private lenders offer flexibility, speed and willingness to arrange complex transactions. In the expansionary cycle, that liquidity closed the gap in the system.
But liquidity is not the same as today.
Today, as loans mature and refinancing activity moves into a higher-value environment, private lenders are becoming more selective. At the same time, delinquency rates are rising in certain asset classes, and banks re-entering the market are doing so with great caution. The middle market is now facing a refinance wall without the cushion it had a few years ago.
What this version represents is not a passing phase, it is a fundamental change.
Commercial lending in the middle market still depends heavily on different dealer relationships and flexible, inconsistent borrower terms. Most jobs are not rejected because of rank alone; instead, they fall apart because one variable doesn’t match well… credit coverage, how the loan is secured, location, loan size, prepayment terms. If one thing doesn’t fit well within the borrower’s requirements, the deal dies.
In strong markets, that inefficiency is easy to ignore. Capital is easily accessible, and borrowers often pay “just enough.” In tight cycles, trial and error is expensive. Salespeople spend weeks or months moving deals. Borrowers incur higher costs or delayed periods. Lenders waste time submitting presentations that were never ready to begin with.
Private credit increased access to finance, but did not address this fundamental inefficiency. All it did was increase the supply. It didn’t fix the match.
If liquidity continues to contract, the middle market will need something more durable than another wave of money. It will require transparency in how lenders make decisions, and consistency in how deals are compiled and analyzed.
CRE lending is complex by design. There are a number of variables that determine whether an activity is effective. The problem has never been a lack of lenders; was the absence of systematic, reliable means of matching the borrower’s priorities with the lender’s requirements before the deal entered the market.
As this cycle begins again, discipline will be more important than speed. Fit will be more important than the rating of the subject. Consumers who can accurately evaluate lenders’ terms will operate differently than those who rely on relationships alone. Lenders who find the best matched opportunities will allocate money with confidence.
Private credit was the bridge. Now the market is forced to deal with the underlying infrastructure.
The next phase of middle market CRE will not be defined by who owns the money. It will be defined by who you can match with intelligence.
Mitch Ginsberg is the CEO of CommLoan.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: [email protected].
