Beyond the Bank: Private Debt Funds vs. Traditional Lenders

08/02/2025

Industry Insights Deal Book

In today’s commercial real estate finance arena, the traditional bank-centered model is giving way to a more complex lending ecosystem. Rising interest rates and recent regional bank turmoil have pushed many banks onto the sidelines, forcing borrowers to look “beyond the bank” for capital. Major bank failures in 2023 and a higher cost of funds led traditional lenders to retrench and tighten credit dramatically (GlobeSt – Banks Tiptoe Back Into CRE Lending (2025)). This retreat created a financing void that alternative lenders – notably private debt funds and other non-bank institutions – are eagerly filling. In effect, a new era has dawned where private credit and other alternative capital sources play an essential role in funding real estate deals.

A Shifting CRE Lending Landscape

For decades, commercial banks dominated CRE lending, but that dominance is eroding amid rapid market shifts. By late 2024, banks held roughly 45% of outstanding commercial mortgages – down from past years – and their share of new originations had fallen sharply (Cambridge Associates – CRE Debt Allocation (2024). With banks curbing their exposure, a significant financing gap has emerged (PREA Quarterly – Financing Gap (2024)). Tighter regulation, balance-sheet pressures, and caution around sectors like office have left banks extremely selective on new loans. According to the Mortgage Bankers Association, lending by depository banks plummeted by over 60% in 2023 compared to the prior year. In practical terms, many borrowers who once relied on their local bank are finding the vault door closed.

Into this gap have stepped private debt funds, insurance companies, and other alternative lenders. Market uncertainty and a series of bank collapses opened the door for these nonbank capital providers to “fill the void” in CRE finance. Life insurance companies and debt funds – often backed by institutional investor money – began funding deals that banks wouldn’t, from construction loans to refinancings. Even as overall credit tightened, these alternative lenders saw an opportunity to deploy capital. KKR’s real estate credit arm, for example, described the current environment as a “compelling” opportunity, estimating that banks’ pullback has left roughly a $300 billion lending shortfall in the U.S. market for others to cover. In short, a broad re-balancing is underway: traditional lenders are retrenching, and private capital is rising to meet the financing needs of a changing CRE market.

Traditional vs. Private Lenders: Cost and Flexibility

This shift has put the spotlight on how deal terms differ between bank loans and private debt financing. Generally, banks still offer the lowest interest rates – thanks to their low-cost deposits – but today those rates come with much stricter conditions. Many banks now insist on recourse guarantees, hefty deposit holdbacks, and tighter covenants to mitigate risk. Loan-to-value ratios have been reined in (50–60% is common for bank loans on riskier assets), and approval times can be sluggish as credit committees scrutinize every detail. In short, bank financing has become conservative, slow, and limited to only the strongest deals.

Private debt funds and other non-bank lenders take a very different approach. These lenders charge higher interest rates (often several percentage points above comparable bank loans) in exchange for greater speed and flexibility. It’s not unusual for a bridge or mezzanine loan from a debt fund to carry a high single-digit or low double-digit yield, reflecting the greater risk and bespoke structuring involved. Yet for many borrowers, paying more is a trade-off for getting the deal done. Private lenders can often close loans in weeks, not months. They typically offer interest-only terms and are willing to underwrite less conventional assets or business plans – financing lease-up strategies, renovations, land development, and other “story” deals that banks shy away from. Crucially, most alternative lenders provide non-recourse financing, focusing on the property’s value and cash flow rather than demanding personal guarantees. They evaluate assets on a case-by-case basis and can craft creative terms (e.g. flexible draw schedules or payment reserves) to suit a project’s needs.

In the current climate, banks’ caution is private lenders’ gain. As one market analysis noted, banks have become so risk-averse – requiring borrowers to park large deposits and meet stringent metrics – that many quality sponsors are opting to work with debt funds and insurance lenders instead (GlobeSt – Banks Tiptoe Back Into CRE Lending (2025)). The latter can offer a more streamlined process and certainty of execution, albeit at a higher cost of capital. For example, life insurance companies (traditionally conservative fixed-rate lenders) are now leveraging their balance sheets to do more bridge and hybrid loans, beating out some debt funds on rate in the process. The bottom line: traditional lenders still provide cheaper money, but they will only lend under narrow circumstances. Private debt funds will lend on a broader range of deals and timelines – from short-term bridge loans to junior mezzanine pieces – but they command a premium for that flexibility. Successful investors recognize which financing option fits their situation, weighing ultra-low cost versus agility and certainty.

The Rise of Private Debt Funds and “Dry Powder”

The growing influence of private debt funds in CRE isn’t a short-lived phenomenon – it’s backed by years of capital accumulation. Private credit funds (which include real estate debt funds) have exploded in size over the past decade, rising from roughly $436 billion in assets in 2013 to more than $1.7 trillion in 2023 This surge reflects a structural shift: institutional investors and high-net-worth individuals have poured money into private lending strategies, attracted by the higher yields and secured nature of these loans. In the real estate sector specifically, hundreds of new debt funds launched in recent years to capitalize on banks’ retreat. Even large private equity players like Blackstone, Brookfield, and KKR have built dedicated real estate credit arms, raising multi-billion-dollar funds to provide mortgages, mezzanine loans, and preferred equity. Meanwhile, the life insurance industry – historically the third-largest source of CRE debt – has steadily grown its mortgage portfolios, increasing loan originations even as banks pulled back. Insurers have been expanding into new loan products (including construction and bridge financing) to seize market share from banks, all while leveraging their ability to lock rates and offer longer terms to borrowers.

A key advantage fueling these alternative lenders is the record level of “dry powder” they hold. Dry powder refers to committed but undeployed capital – essentially, cash ready to be lent. As of early 2024, private real estate debt funds globally had roughly $75–80 billion in dry powder earmarked for lending. By some broader measures (including opportunistic real estate funds that can do credit deals), the available capital could be a few times that. This means there is a vast reservoir of financing available outside the banking system, waiting for the right deals. In 2024 and 2025, many debt fund managers actually slowed their deployment, biding their time as interest rates peaked and property values corrected. Now, with a wave of loan maturities looming, those funds are primed to act. Industry research shows that more than $2.5–4.5 trillion of U.S. commercial mortgages come due over the next five years (PREA Quarterly – Financing Gap (2024)) . Not all will need new capital – some will extend or pay off – but a huge volume will require refinancing in an era when banks are constrained. This scenario sets the stage for private lenders to significantly increase their market share. Even with tens of billions in dry powder, private debt funds alone cannot refinance all maturing loans, but they don’t have to – they can cherry-pick the best opportunities and demand attractive terms. As one investment strategist noted, the stack of undeployed capital in debt funds is relatively small compared to the multi-trillion-dollar debt market, so competition among lenders remains moderate and spreads are staying wide. In essence, private debt funds have ample ammunition to lend, but the sheer scale of demand means well-capitalized lenders should enjoy strong deal flow and healthy yields for the foreseeable future.

Another telling trend is the involvement of large institutional players in this space. Some of the world’s biggest asset managers and private equity firms now manage real estate credit funds alongside their equity investments. For example, Blackstone’s Real Estate Debt Strategies series closed an $8 billion fund in 2023, one of the largest of its kind. Others, like insurance giant MetLife Investment Management or PGIM (Prudential), have ramped up their lending activity, stepping in to finance high-quality assets when banks wouldn’t. This institutional influx brings deep pockets and additional discipline to the private lending market. It also signals confidence that providing loans at higher spreads – backed by real assets – is a savvy play in the current cycle. In sum, the CRE debt landscape in 2025 features a much broader array of lenders. Debt funds, mortgage REITs, private equity firms, and insurers are all increasingly active, armed with capital and looking to fill the gap left by retreating banks.

Implications for Borrowers: Creative Financing Strategies

For property investors and developers, these shifts demand a strategic re-think of how to secure funding. The good news is that capital is still available – often more readily than headlines might suggest – but it may come from unfamiliar places or in different forms. Borrowers who approach only their usual bank might walk away empty-handed in this environment. Instead, savvy players are broadening their relationships to include alternative lenders and embracing more creative financing structures to bridge any shortfalls.

One immediate adjustment is the acceptance that leverage levels may be lower from senior loans, and additional layers of capital could be needed. If a bank or insurance lender is only willing to lend, say, 50–60% of a project’s cost, the deal doesn’t have to die there. Borrowers are increasingly tapping mezzanine debt and preferred equity to top up the capital stack when traditional loans fall short (American Association of Private Lenders – Debt Funds (2024)). A mezzanine loan or pref equity investment can effectively act as a second mortgage (though structured as equity) that fills the gap between the senior loan and the borrower’s cash equity. While this money is expensive – it might carry a mid-teens return hurdle – it can be the difference that makes a project feasible. By layering financing in this way, sponsors are able to achieve higher overall leverage (often 70–80% of cost combined) even when no single lender will underwrite the whole amount. Importantly, these subordinate financings are usually provided by debt funds or specialized investors who understand the asset’s upside and are willing to take a junior position for a higher yield. The trade-off for the borrower is a higher blended cost of capital, but that often beats giving up the deal or raising significantly more equity.

Bridge loans have similarly become a lifeline for many situations. Rather than the 10-year permanent mortgages that banks used to readily offer, many owners are now securing 12–36 month bridge financing from private lenders to buy time and execute their business plans. For instance, if a property’s occupancy or income is temporarily depressed, a debt fund might provide a short-term loan based on the asset’s future stabilized value – something a bank would likely refuse under today’s stricter underwriting. The borrower can then use that interval to lease up the property or complete renovations. Once the asset stabilizes, they have the option to refinance with a more traditional lender (hopefully under better market conditions) or sell at an improved price. This “bridge-to-bank” strategy is allowing investors to navigate the current turbulence and position for a refinancing when credit markets normalize. In the meantime, the borrower pays a premium for the bridge loan, but often the flexibility and speed more than justify the cost.

Overall, the key for borrowers is to be proactive and open-minded in sourcing capital. That means cultivating relationships with a broader spectrum of lenders – from debt fund managers and family office lenders to credit unions or fintech lending platforms. It also means being prepared to provide more detailed information and transparency; alternative lenders will do thorough due diligence, but they might focus on different metrics (like business plan feasibility or sponsor track record) than a bank would. Borrowers who educate themselves on these lenders’ expectations can structure their requests accordingly. Additionally, creative terms such as interest reserves, accrued interest (PIK interest), or flexible collateral arrangements might be negotiable with private lenders, whereas banks tend to be rigid. Every deal is unique, but in this new era, virtually every deal that is economically sound can find a financing solution – it just might require stacking different pieces or paying a higher rate for a period of time. Those who adapt by seeking out the right partners and structuring deals innovatively are still getting transactions done, even in a high-rate, bank-light environment.

Brokers as Educators and Matchmakers in the New Era

This transformation in CRE finance also reshapes the role of brokers and financial advisors. In the past, a mortgage broker might simply take a deal to a handful of local banks and life companies and call it a day. Now, to truly serve clients, brokers must act as educators and matchmakers in a much more dynamic capital market. Successful brokers are investing time in building connections with the growing universe of private lenders – from debt fund principals and mortgage REIT teams to private wealth lenders and crowdfunding platforms. By knowing who the active alternative players are, brokers can quickly pair a client’s financing need with an appropriate capital source. For example, if a client owns a half-leased office building that a bank won’t touch, an experienced broker might know a debt fund specializing in value-add office or a private lender willing to lend on the asset’s future potential. That kind of targeted matchmaking is increasingly what gets deals across the finish line.

Just as important is setting client expectations and educating them on new financing realities. Many borrowers are still adjusting to the post-2022 world: loan proceeds are lower, rates are higher, and the lender on your deal might not be a household-name bank. A seasoned broker can explain upfront that, for instance, a private debt fund offering a 9% interest-only loan with quick closing might actually be the best (or only) option available for a particular deal – and that this is now normal in the market. By providing data and context – perhaps sharing examples of recent loans closed by non-bank lenders – advisors help clients understand that alternative financing is not “last resort” money; it’s a mainstream solution in today’s climate. Educating investors on structures like mezzanine debt or preferred equity is also part of this consultative approach. When clients grasp how these tools work (and how they can save a deal), they become more amenable to creative solutions. The brokers who can clearly articulate the costs, benefits, and risks of these financing strategies will instill confidence in clients despite the tougher lending environment.

Technology and market data are becoming indispensable in this effort. Digital platforms – including commercial real estate marketplaces and financing networks – can provide real-time insights into which lenders are active and what terms are being quoted. By leveraging marketplace data, brokers can identify, for example, that several debt funds are aggressively lending on multifamily developments in the Southeast, or that a particular private lender just launched a program for hotel loans. This intelligence allows brokers to proactively connect the right deals with the right capital. Some online marketplaces even facilitate direct introductions between borrowers and non-bank lenders, streamlining what used to be an informal, relationship-driven process. In effect, data-driven matching is augmenting the broker’s rolodex.

Ultimately, the commercial real estate financing game is changing – and expertise is more critical than ever. Brokers and advisors who embrace the new landscape by expanding their lender networks and skillfully guiding clients through alternative financing options are adding tremendous value. They are the ones who will ensure clients don’t abandon an investment opportunity simply because a bank said “no.” Instead, they’ll help restructure the deal, maybe bringing in a mezzanine partner or sourcing a bridge loan, to get it done. In this evolving market, knowledge truly is power: understanding new capital sources and creative deal structuring separates the leaders from the pack. The key takeaway for all industry participants is that flexibility and open-mindedness are paramount. There is capital beyond the bank – often plenty of it – but finding and securing it requires a broader vision and a willingness to innovate. Those who adapt and educate their clients about these emerging funding sources will not only survive the current credit crunch; they’ll position themselves at the forefront of CRE’s new era of finance.