The rapid rise of private credit is drawing fresh scrutiny from global regulators, who warn the opaque and increasingly interconnected market could amplify stress across the financial system in a downturn—an outcome with direct implications for commercial real estate borrowers and lenders alike.
A new report from the Financial Stability Board flags "potential vulnerabilities around bank interlinkages and lenders' credit exposures, and highlights data challenges for effective monitoring," adding that the sector "remains untested to a prolonged economic downturn," warranting close attention. An abrupt shift in economic conditions, the group warned, "could expose leverage and borrower credit quality vulnerabilities."
Those concerns land as private credit has grown into one of the most important—and least transparent—sources of capital for real estate and other middle-market borrowers. Estimates put the market between $1.5 trillion and $2 trillion as of the end of 2024, though the FSB noted the difficulty of pinning down precise figures. Apollo has taken a far more expansive view, estimating private credit as a $40 trillion market, "a majority of which is investment grade."
The sector's evolution is part of the story. What began as a niche funding channel for mid-sized companies has broadened to include larger corporate borrowers and, increasingly, retail investor access. For commercial real estate, that shift has been particularly consequential as banks pull back from construction and transitional lending, leaving private credit funds to fill the gap—often at higher leverage and pricing.
"This report is an important first step," Secretary-General John Schindler told reporters, according to the Financial Times. "However, several areas merit further analysis."
One of those areas is the growing entanglement between banks and private credit funds. The FSB noted that the two "are interconnected through financing arrangements and strategic partnerships between banks and asset managers," with banks frequently extending credit lines to the funds.
While direct bank lending to private credit appears "relatively small" at less than 0.5% of total assets, the report cautioned that there is "relatively large" uncertainty around the true scale of exposure.
That uncertainty moved from theoretical to tangible just a day before the report's release. HSBC disclosed an unexpected $400 million loss tied to the collapse of U.K.-based mortgage lender Market Financial Solutions, sending the bank's shares down 6%. The exposure was indirect, as HSBC had lent to Atlas SP, an Apollo-backed private credit firm, which in turn had extended financing to MFS. Atlas SP had previously disclosed a £400 million (USD$544 million) exposure to the lender following an enforcement investigation by Britain's Financial Conduct Authority.
For commercial real estate, the episode underscores how risk can travel through layered financing structures that are harder to track than traditional bank lending. As private credit continues to finance bridge loans, development projects, and recapitalizations, especially in stressed property sectors like office, those interconnections could become more consequential if asset values decline further or refinancing windows tighten.
Leverage is another pressure point. The FSB cited "external sources" showing private credit borrowers carrying debt levels of five to six times EBITDA, compared with roughly four times in the leveraged loan market. With widespread use of EBITDA adjustments, the report suggested actual leverage could be closer to seven times, raising questions about how borrowers would perform under sustained income pressure—a scenario already familiar in parts of the CRE market.
Early signs of strain may already be emerging. The report pointed to "some preliminary signs of rising defaults" and an increase in borrower downgrades. While one study found outright defaults at approximately 1%, that figure rises to around 5% when including restructuring transactions known as "selective defaults," which the FSB noted are "comparable to the selective defaults observed in the US high-yield debt market."
For CRE professionals, the takeaway is less about imminent crisis and more about visibility. Private credit has become a critical funding source as property fundamentals recover unevenly, particularly in office and certain multifamily segments. But the same flexibility that made private credit attractive—bespoke structures, lighter disclosure and rapid growth—also makes it harder to assess how risk is distributed across the system.
As regulators push for better data and monitoring, the industry may face greater transparency demands. In the meantime, lenders, investors, and borrowers in commercial real estate are operating in a market where capital remains available—but the underlying risks may be more interconnected and less understood than they appear.
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