Banks Fueled The Rise Of Private Credit. Now They're 'Competing Against Ourselves'

Banks trying to reenter the commercial real estate lending game have found themselves in a Catch-22.

Regulatory scrutiny and balance sheet issues effectively barred financial institutions from the market starting in 2023. Instead of disappearing completely, they lowered their exposure by lending to their new counterparts.

“We've backlevered ourselves essentially by financing some debt funds and causing that margin compression,” KeyBank Real Estate Capital Regional Executive Alan Isenstadt said at Bisnow’s New York Investment and Lending Conference.

But even as banks' appetite for CRE lending has returned, debt funds are grabbing more and more market share.

“We’re competing against ourselves on two sides,” Isenstadt said.

Bank activity has been resurgent over the past year as lenders have offloaded problem loans. Policy changes, such as those proposed for Basel III Endgame, also mean banks face fewer capital requirements. 

Although banks have returned in a stronger position, the landscape no longer looks the same. Debt funds suddenly have more firepower — in part thanks to the capital banks provided them. 

To contend, banks must be able to provide more flexible structures, faster execution and looser covenants, which can be difficult, as banks tend to have higher compliance costs and tighter underwriting standards.

“We can obviously take a little bit more cash flow or transitional risk within our debt fund business,” said Tony LaBarbera, managing director and co-head of Americas private investments for Blackstone Real Estate Debt Strategies.

After evacuating following the 2023 banking crisis, banks reclaimed the top spot for nonagency loan closings last year, capturing 34% of the market, according to CBRE’s Lending Momentum Index. The percentage was still below historic norms, yet alternative lenders have since retaken the lead anyway. 

Alternative lenders were responsible for 53% of CRE debt originations in the first quarter, with debt fund deal activity surging 280%, according to CBRE. Banks’ market share fell to 22%.

Private credit is “challenging the incumbency of the agencies, the banks and the CMBS folks,” Ariel Property Advisors Senior Director of Capital Services Matt Swerdlow said at the event, held at the New York City Bar Association. 

Debt funds are particularly prominent in large deals where other lenders may be more capital-constrained. Many of the largest construction loans being doled out in New York and Miami are being led by the likes of Tyko Capital, Apollo Global Management and S3 Capital.

As a result, banks are now pinpointing openings elsewhere. 

BDT & MSD Partners Real Estate Credit Opportunities Fund Managing Director Samantha Rotchford said most banks are focusing on deals below $100M and are largely avoiding construction lending. Otherwise, they are continuing to fund private lenders. 

“They’re really becoming servicers to our business in a good way,” Rotchford said. “You’re seeing them tighten spreads in lockstep with the overall market, which has been a great feeder to our business.”

Committed credit lines by the largest U.S. banks to private credit vehicles, such as private debt funds and business development companies, increased 145% over five years, reaching $95B by the fourth quarter of 2024, according to a report by the Federal Reserve. At the time, $56B had been utilized.

Most bank borrowing by private credit occurs through revolving credit lines, which totaled $49B for BDCs and $30B for debt funds, according to the report. That trend has continued, panelists said. 

“It’s not that difficult to get a warehouse line today,” Rotchford said. “It’s more freedom to [the banks’] balance sheets.”

Despite a return in appetite, banks remain impaired by their balance sheets, which have been subject to extend-and-pretend practices for problematic loans. Other major players, like Silicon Valley Bank and Signature Bank, have gone out of business, leaving gaps for private credit to fill.

Still, this could be the “high-water mark” for private credit vehicles, Dansker Capital Group CEO Andrew Dansker said. Inevitably, banks will be able to offload enough troubled debt to start getting more aggressive on requirements for borrowers, further increasing competition.

“I wonder how much that will shrink the debt fund business over time,” Dansker said.