Trying to pin down the role — and the implications — of private credit for CRE is a challenge. Even JPMorgan Chase chief executive Jamie Dimon has warned of the potential dangers and played them down.
A recent CBRE report asked the question of whether private credit stress is "contained or contagious." To understand the answer requires a definition of private credit. There are four types: corporate direct lending (senior secured term loans), asset-backed (senior secured or subordinate to loan pools), CRE mortgages (senior secured or subordinate financing with commercial real estate collateral) or infrastructure (lending backed by cash-flow-producing hard assets).
CBRE argues that private credit issues are unlikely to pose systemic risk to financial markets and so are not a major issue for commercial real estate, although there could be impacts.
It wrote that because private credit is a much smaller debt class than subprime mortgages during the global financial crisis, there is less danger today because banks are better capitalized.
CBRE says that current stress in private credit is "largely concentrated" in the corporate direct lending segments, although there could be indirect effects on CRE if private credit stress pushes banks to tighten credit lines or if limited partners lose confidence, slowing fundraising.
The ties to banks, however, are strong, as the depository institutions are backing many of the efforts. Also, alternative lenders, including CRE debt funds and mortgage REITs, have become a primary source of bridge, mezzanine and transitional financing.
CBRE additionally said that the issues in private credit are "mostly confined to Business Development Companies (BDCs), particularly those lending in the software sector … with limited or incidental commercial real estate exposure." BDCs are primarily corporate and middle-market lenders "with limited or incidental commercial real estate exposure," and so don't directly reduce CRE debt fund lending capacity.
There are, according to CBRE, three aspects of BDCs that could need closer attention.
One is industrial concentration, with tech and software between 20% and 40% of the BDC loan portfolios. Given AI disruption, many have questioned the creditworthiness of borrowers.
BDC portfolios are "inherently illiquid" with no deep secondary markets. Redemption requests can create negative feedback loops, putting pressure on funds.
Third, listed BDCs have fewer redemption risks, but "they are exposed to price risk as market sentiment shifts." The unlisted BDCs have more stable capital bases but face greater risks from redemption.
CBRE said that structural buffers are unlikely to allow problems in private credit to turn into broad contagion. A greater potential risk is in possible interactions with macro-economic conditions and policy changes. That could include regulatory tightening, higher tariffs, restrictive immigration policy, ongoing conflict in the Middle East and residential and retail demand.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.