Debt Funds Are Reshaping CRE Lending: What Borrowers Should Know
Five years ago, most commercial real estate borrowers thought of debt funds as a last resort. The perception was simple: if your bank said no, you called a debt fund and paid a premium for the privilege. That perception is outdated. Private credit has fundamentally changed the CRE lending market, and debt funds are no longer just filling gaps left by traditional lenders. They are actively competing for, and winning, deals that banks used to own.
At Barrow Street Advisors, we are placing more capital with debt funds than at any point in our firm's history. Here is why that matters for borrowers.
The Scale of the Shift
Private credit's expansion into commercial real estate has been dramatic. Debt funds now account for roughly 15-20% of all CRE originations, up from single digits a decade ago. Some estimates put total dry powder among CRE-focused debt funds north of $150 billion heading into 2026.
This growth reflects several converging forces:
Where Debt Funds Compete
Debt funds are not a monolith. The sector spans a wide range of strategies, risk profiles, and return targets. Understanding where different types of debt funds operate helps borrowers identify the right capital for their specific situation.
Transitional and Value-Add Lending
This remains the sweet spot for many debt funds. If you are acquiring a property that needs repositioning, lease-up, or capital improvements before it qualifies for permanent financing, debt funds are often the most natural fit.
Typical terms for transitional loans from debt funds:
Bridge-to-Permanent Strategies
Some debt funds have expanded into bridge lending that competes directly with banks. These funds target stabilized or near-stabilized assets where the borrower needs short-term flexibility before locking in long-term fixed-rate debt. Pricing on these deals can be surprisingly competitive, sometimes within 25-50 basis points of bank quotes, particularly for strong sponsors with repeat business.
Construction and Development
A growing number of debt funds are active in construction lending, a space that many regional and community banks have vacated. Debt fund construction loans tend to carry higher pricing than bank equivalents, but they offer higher leverage (sometimes 75-80% of cost) and more flexible structures. For developers who need to maximize their equity return, the higher interest cost can be worth the trade-off.
Whole Loan and Senior Stretch
Perhaps the most interesting recent development is the emergence of debt funds offering whole loans at leverage levels that eliminate the need for mezzanine debt. Instead of a traditional capital stack with a 60% LTV bank loan plus a mezzanine tranche, some debt funds will write a single 75% LTV loan. This simplifies the capital structure, reduces closing costs, and eliminates intercreditor complexity.
The Advantages
Our clients consistently cite several reasons for choosing debt fund capital over traditional bank financing:
Certainty of execution. Debt funds make credit decisions with fewer layers of approval. A senior partner or investment committee can approve a deal in days, not weeks. For borrowers competing in auction processes or working against tight contract deadlines, this speed is genuinely valuable.
Flexibility on structure. Banks operate within regulatory guardrails that limit their ability to customize loan terms. Debt funds face fewer constraints. Need a funded interest reserve? A pre-negotiated future advance for tenant improvements? A creative earn-out tied to lease-up milestones? Debt funds can accommodate these structures more readily.
Asset class breadth. While banks have pulled back from certain property types (hotels, ground-up development, single-tenant office), many debt funds remain active across the full spectrum. For borrowers with assets that do not fit neatly into a bank's credit box, debt funds offer a viable path to execution.
Relationship continuity. Unlike CMBS, where your loan gets securitized and serviced by a third party, most debt funds hold their loans on balance sheet and service them directly. This means the team that originated your loan is the same team you call when you need a modification or consent. That matters.
The Trade-Offs
Debt fund capital is not always the right answer. Borrowers should weigh several considerations:
How We Advise Clients
When our clients ask whether a debt fund is the right fit, we start with three questions: What is the business plan? What is the timeline? And what does the rest of the capital stack look like?
For a stabilized multifamily asset with a 10-year hold period, a Fannie Mae or life company loan almost always makes more sense. For a value-add office acquisition that needs 18 months of repositioning before refinancing into permanent debt, a debt fund is probably the better choice.
The reality is that most sophisticated borrowers use debt funds alongside traditional lenders, not instead of them. The key is matching the right capital source to the right situation. That is where having an advisor with deep relationships across both worlds makes a meaningful difference.
We maintain active relationships with over 200 debt funds ranging from large-scale platforms managing $20 billion or more to specialized funds focused on specific property types or geographies. This breadth allows us to run targeted, competitive processes that deliver the best available terms for each transaction.
Looking Ahead
Private credit's role in CRE is only going to grow. Regulatory headwinds for banks show no signs of easing, institutional investors continue to increase allocations to private credit, and the operational sophistication of debt fund platforms improves every year. Borrowers who understand how to access this capital, and when it makes sense to do so, will have a meaningful advantage.
If you are weighing your financing options or want to understand how debt fund capital could fit into your next transaction, reach out to our team at Barrow Street Advisors. We are happy to walk through the options.