For LPs, private credit in real estate is here to stay

Private credit has enjoyed a period in the limelight over the last 12 months. Looking to the future, what areas of the market are the most interesting and exciting for Greystar?

We tend to follow demographic tailwinds and focus on asset classes with strong underlying fundamentals across the living sector. Specifically, we focus on markets in which we operate at scale, have steady household formation and positive supply-demand fundamentals, boast liquidity, and provide cash-flow resiliency against credit risk.

National and regional banks, which have played an outsized role in commercial real estate lending over the last cycle, are now seeing incremental regulatory and capital requirements which may limit commercial lending appetite and provide ‘white space’ for private lenders to step in. We see secular tailwinds to the private lending markets as we anticipate there will likely be further regulation and capital standards on traditional lenders going forward.

We created the credit business at Greystar around a void of flexible capital at leverage levels moderately above where traditional lenders have demonstrated comfort. This capital is valued by sponsors that have a consistent need for capital to acquire, develop, refinance, and renovate assets, and who value the flexibility of a type of debt that can be repaid at any time.

The sweet spot today exists in transition financing. A large percentage of these opportunities are in lending to developers that are trying to lease up and are carrying high-cost construction financing. Developers need a few years to turn the rent rolls and improve cash flows and thus are looking to fill this gap with temporary financing.

Given the amount of product delivering in the near term, we anticipate there is significant opportunity in this segment on the horizon based on our current pipeline. Additionally, we anticipate other segments of the market will heat up for private lending as we enter a new phase of the cycle, like value-add and construction financing from private lenders.

What is the market looking for from private credit today?

The appetite for private credit has been very strong over the past few years given its solid ‘equity like’ returns which are extremely attractive on a risk-adjusted basis. Credit positions in housing have provided durable, low double digit returns at a great basis in an asset class that has demonstrated cash flow resiliency.

We lend almost exclusively to rental housing projects with sound underlying fundamentals, given the structural shortage in the US and minimal volatility in cash flows. We believe that our strategy may be more appealing on a risk-adjusted basis than asset types with more uncertainty around demand fundamentals, such as office or hospitality.

There tends to be more concern as you move up leverage levels, but we feel comfortable slightly above where the larger regional banks and national banks and agencies tend to lend given our vertically integrated national rental housing platform.

Our partners are quite keen to focus on operational experts within the credit space. We expect resilience in rental housing and apply meaningful operations expertise coupled with a deep understanding of cash-flow risk when underwriting opportunities.

Private credit has been a hot topic for over a year now in the US. What do you say to those who might assume that the opportunities will decrease as rates fall?

I think we’re still in the early innings of credit opportunities given the sheer volume of maturities, amount of new product being delivered that requires bridge lending, and a recognition that there’s less debt capital available from the banking sector given current exposure and increased regulatory scrutiny.

Although base rates and spreads may move going forward, we do not believe they are returning to ultra-low rates. As rates start to come in, there may be opportunities, particularly at the leverage levels needed to continue to develop the volume of housing that our country needs.

Given the scale of the institutional rental housing market in the US, we believe we’ll continue to see a consistent volume of opportunities in private credit, but we’ll remain nimble as the rate environment shifts.

About
Kevin Kaberna leads Greystar’s Investment Management platform, including fund management, portfolio management, capital projects, and asset management in North America. Kevin is also a member of the Greystar Executive Committee. Under his leadership, the North America Investment Management business has grown to over 195,247 units and student beds owned. Kevin maintains oversight over logistics and housing investments, including conventional, student, build for rent, active adult, and credit.

_{This article originally appeared in Preqin 2025 Global Report: Real Estate. The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and Greystar accept no liability for any decisions taken in relation to the above.}