Commercial lending took another tumble in the first quarter as banks remained on the sidelines. Private lenders seized on the chance to pick up the slack and bail out some of the many borrowers with big loans coming due.

Alternative lenders were responsible for 47.2% of nonagency loan closings tallied in a new CBRE report detailing Q1 commercial mortgage activity. Banks accounted for roughly 23%.

“There are many, many billions of dollars of commercial real estate loans that are going to mature, and CLOs and issuers of private credit are going to step in and fill the gap,” Trepp Senior CRE and CMBS Researcher Thomas Taylor said.

Collateralized loan obligation, or CLO, issuance surged in particular, increasing to $1.5B in the first quarter from $700M at the end of 2023.

A lending index compiled by CBRE dropped 32.7% in Q1, reflecting banks’ pullback and high interest rates dampening the capital markets overall. The index is based on the deals CBRE completes, with the level of activity in 2005 serving as the baseline, or 100 on the index. In Q1, the index reached 168.

Alternative lenders have been lured to the market by two realities, Taylor said.

“One is acceptance of the rate environment that we’re going to be in. I think a lot of fixed-income traders, borrowers, market participants, have come to accept the higher-for-longer interest rate environment,” Taylor said. “It would have been foolish to lock in five or more years of debt if you truly believed that rates were going to be slightly or even significantly lower later this year.”

The other is the so-called wall of maturities in the commercial property market.

Although many borrowers spent 2023 modifying debt to avoid impending maturity, there are still waves of borrowers that need to refinance. Nearly $1T of debt backed by commercial property is set to mature this year, according to MSCI.

Adding to the pool of new money is a crop of big-name players plunging into real estate credit with multibillion-dollar funds. Goldman Sachs just this month announced it amassed a $7B debt fund, and private equity firm TPG launched its first debt fund in November with $750M.

Merchant Bank, affiliated with tech giant Michael Dell, also jumped in with its $3.2B MSD Real Estate Credit Opportunity Fund.

These deep wells of money dedicated to debt, combined with sources like life insurance companies, CMBS and agency debt, can support the supply in the market, CBRE U.S. President of Debt and Structured Finance James Millon said in emailed comments.

But looking ahead, CBRE’s report said stabilization has begun in the commercial mortgage market. In addition to increased refinancing demand and an influx of alternative lenders, narrowing credit spreads are a sign of improved conditions, according to the report.

Those predictions are showing up in deals so far in the second quarter but aren’t uniform, according to David Putro, senior vice president at Morningstar Credit Analytics.

In the CMBS world, where Putro specializes, large single-asset, single-borrower loans are coming back to an extent, but only for some property types.

“In terms of really large loans … most of the lending there has been on industrial. Your really big, billion-dollar industrial pools,” Putro said.

“We’re pretty high on retail,” he added. “We think that retail is being rethought of by a lot of large corporations.”

The property type on the other end of the spectrum comes as no surprise.

“I think the dark cloud is office,” Taylor said. “Lodging is still in some trouble. It had a bad month last month.”

Office loans are the most likely to require refinancing as maturities arrive, with large, highly leveraged assets first in line. In April, $1.8B of office loans became newly delinquent, Taylor said, with just six buildings accounting for 80% of that.

The industry still wants its interest rate cuts this year, but private players have learned to adapt to the challenging territory, Putro said.

“Even though rates haven’t come back down, that volatility that was there for a little bit has more or less stabilized,” Putro said. “So you know, it’s a bit more of a predictable outcome than it was 18 months ago when you were getting increase after increase.”