The Next Era of Private Credit

While uncertainty continues to challenge sentiment and activity, the stability and resilience of private real estate credit can provide a reliable income stream with built-in downside protection.

• At $4.8 trillion the U.S. private CRE credit market is an asset class comparable in size to major fixed income markets, offering a robust foundation for diversified investment.

• Private CRE credit enhances portfolio returns by providing predictable income streams and downside protection, while maintaining low correlation to other major asset classes, minimizing additional risk.

• Normalizing interest rates drive high current income while a recovering real estate market strengthens credit fundamentals, boosting the potential for solid returns on new investments while reducing risk.

• Increased need for debt capital, driven by loan maturities, building modernization needs and selective bank appetite, creates opportunities for alternative and flexible financing solutions.

• A growing range of property types, including operational assets, provides an expanded universe of investment opportunities, allowing for greater diversification and higher value-creation potential.

Executive Summary

A new private credit ecosystem is emerging across asset managers, banks, and insurers. Here’s what it means for the industry.

Why Private CRE Credit Makes Sense Now

Private commercial real estate (CRE) credit has outpaced both real estate equity and traditional fixed income in total returns over the past decade, a period marked by a significant reset in property values.

While CRE credit has historically outperformed traditional fixed income, the recent downturn in real estate has contributed to its outperformance relative to equity (Exhibit 1). With risk-free rates now higher than in the previous cycle, real estate credit is expected to continue performing well.

With a focus on income-driven approaches offering downside protection and capital preservation, real estate credit provides a predictable income stream with lower volatility compared to real estate equity and traditional fixed income.

As the market continues to face uncertainty, we are reminded of the stability and resilience of private real estate credit, and the downside protection it brings.

Moreover, the current market environment, characterized by elevated but moderating interest rates, offers a solid income stream. Conservative attachment points also provide significant equity cushions, enhancing principal protection.

As the real estate market approaches recovery, a specific segment of the private real estate credit market warrants closer attention: financing for valueadd business plans. This strategy primarily utilizes floating rate loans, which mitigates interest rate risk, while strategic leverage can boost returns without adding property or credit risk. This segment benefits from increased demand for shorter-term loans as borrowers anticipate future rate cuts.

1) A $4.8 Trillion Asset Class

• The U.S. private CRE credit market, valued at $4.8 trillion,4 represents a substantial asset class on par with major fixed income markets (Exhibit 2).

• This depth allows for a diverse array of loan structures, with varying durations and secured by a broad range of property types across multiple locations. The diverse credit profiles of the underlying tenancy further enhance the market's diversification potential.

• Despite its private nature, the private CRE credit market offers significant breadth, providing investors with ample opportunities to strategically allocate capital to assets that align with their investment goals and risk profiles.

2) Portfolio Enhancing Features

• Private CRE credit has outperformed major fixed income asset classes while exhibiting lower volatility. This combination has delivered Sharpe ratios nearly twice those of other fixed income indices, positioning it as an attractive choice for optimizing portfolio risk-adjusted returns.

• With correlations of less than 100% to traditional fixed income investments, private CRE credit provides diversification benefits to fixed income portfolios.

• From a risk management standpoint, private CRE credit has exhibited less severe and shorter-lived maximum drawdowns compared to other fixed income assets, helping to limit portfolio losses during periods of financial market turmoil and drawdowns.

3) Improved Risk-Return Profile

• The rise in interest rates has benefited floating rate loans by increasing coupons, and thus, absolute returns on private CRE credit investments.

• Private CRE credit will continue to offer high current income, even as interest rates moderate.

• While elevated coupons may strain a borrower’s ability to pay interest, the expected recovery in the real estate market will enhance property cash flows, improving debt serviceability.

• Loans originated now are expected to experience declining credit risk over time as income and property values are forecast to grow (Exhibit 4).

• Higher income and stronger credit fundamentals together provide the potential for solid returns on new CRE credit investments.

4) Growing Need for Debt Capital

• Maturity Wall: High volume of maturities, due to loan modifications and extensions, drive demand for refinancing solutions.

• Capex Shortfalls: Increasing need for capital to modernize and institutionalize existing stock, as many buildings were underinvested in the last cycle.

• Demand from Value-Add Equity Strategies: Rising fundraising for CRE value-add strategies signals greater need for debt capital to support value creation business plans.

• Bank Regulatory Uncertainty: Banks are taking a cautious and highly selective approach, creating demand for alternative debt sources and flexible financing solutions.

4 Mortgage Bankers Association, Commercial and Multifamily Mortgage Debt Outstanding, March 2025.

5 PREA Quarterly, How CRE Debt Can Boost Pension Fund Portfolios, Summer 2024.

6 PGIM Real Estate, Four Compelling Reasons to Diversify with Private Real Estate Credit, June 2023.

7 PGIM Real Estate, Private Real Estate Debt: A Portfolio Risk-Return Enhance Through the Lens of Maximum Drawdowns, August 2023.

8 PREA Quarterly, Stability and Resilience in Uncertain Times: The Strategic Role of Core Real Estate Debt in Fixed Income Portfolios, Winter 2024.

Exhibit 2: Private CRE Credit Market Comparable to Major Fixed Income Markets

Exhibit 4: Credit Fundamentals Strengthen as Real Estate Property Values and Income Streams Improve

Sources: NCREIF, PGIM Real Estate. As of April 2025.

Forecasts are not guaranteed and may not be reliable indicator of future results.

5) Expanding Opportunity Set

The private CRE credit market offers broad exposure across various economic sectors offering diversification benefits across a portfolio.

However, the real estate investment universe is evolving, driven by a growing range of property types, creating an even broader range of investment opportunities with even more diverse exposures.

A notable shift toward more operational assets, including senior living, self-storage, data centers, student housing, co-living and hotels, reflects a focus on income generation. These assets require intensive asset management, opening up new avenues for financing value creation strategies.

Defining the next era of private credit: Four trends

As private credit continues to grow, a new industry ecosystem with more symbiotic linkages across asset managers, banks, and insurance companies is emerging. It will support the origination, syndication, structuring, and distribution of assets at significant scale. We expect four trends to define this new ecosystem: expansion of private credit into a broader array of assets, rise of ecosystem partnerships and open-architecture business models, amplified advantages of scale for competitive differentiation, and increased focus on technology to boost scale and performance.

Expansion of private credit into a broader array of assets

Private credit is expanding to include a broader range of asset types and new sets of borrowers. In our view, four asset classes in particular will increasingly shift to nonbank lenders:

• asset-backed finance, particularly segments that feature higher-risk-adjusted yields attractive to institutional investors (for example, aircraft loans and equipment leasing)

• infrastructure and project finance assets with relatively long durations (five years or more)

• jumbo residential mortgages, particularly those with high-loan-to-value ratios and, for non-primary residences, those that are classified as "nonconforming" under bank regulations

• higher-risk commercial real estate, for which banks are increasingly seeking to reduce their exposure

Each of these asset types ranks highly against at least one of three criteria that contribute to a propensity to transition off of bank balance sheets

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Contacts

Dean Joseph Deonaldo

Investment Vice President

Americas Investment Research

dean.joseph.deonaldo@pgim.com

John Jacobs

Managing Director

Senior Portfolio Manager, U.S. Core Plus Debt Strategy

john.jacobs@pgim.com

Jeremy Keenan

Managing Director

Portfolio Manager, U.S. Core Plus Debt Strategy

jeremy.keenan@pgim.com