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Leveraging the advantages of 60+ years of private real estate debt experience for clients

May 30, 2025
Kevin Catlett
Senior Managing Director, Head of Private Real Estate Debt Origination
Chris Duey
Senior Managing Director, Head of Private Real Estate Debt Portfolio Management
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AT-A-GLANCE

  • With more than 60 years of private real estate debt investment experience, over 30 years providing private debt advisory services, almost a decade of operating a multi-investor Private Real Estate Debt Strategy series, and more than 105 private debt investment professionals, we’ve earned a reputation as a leader in the private real estate debt market.
  • For over half a century, spanning multiple economic and real estate cycles, we have amassed a wealth of organizational knowledge that we believe leads to better asset selection and basis calibrations appropriate for helping to meet client risk/return objectives. Our depth of experience in more than 40 markets—as individuals and as an organization—enables a range of advantages for our clients.

Advantage 1: Experience in over 40 markets across multiple cycles

Gives us an understanding of how submarkets differ in depth of troughs and recovery timelines

No two markets are the same, and even submarkets often perform quite differently. So it is essential to have deep experience within each market and across multiple cycles to understand which submarkets perform best in terms of shallower troughs and faster recoveries. Where some real estate investors will practice less differentiation in market selections, our approach is to go deep within the 40+ markets we know well, giving us the depth of experience to understand which submarkets tend to be more resilient, and we calibrate our approach to investing accordingly.

For example, Principal Real Estate has been investing in the Bay Area for well over 30 years, and we’ve seen how certain submarkets like Palo Alto typically go into a downturn last and come out first compared to other submarkets in the area. This experience has given us the conviction to be one of the most active lenders in these markets and it has served our clients well.

Exhibit 1: Experience has taught us the submarkets that perform much better during down cycles

Silicon Valley, office vacancy rates, %

San Francisco
Silicon Valley
Palo Alto
Office vacancy rates in Silicon Valley, San Francisco and Palo Alto between 1982 and 2024.

Source: CoStar, Principal Real Estate, Q1 2025.

Advantage 2: Experience in a variety of interest rate environments

Gives us a deep understanding of the interrelated nature of capital market dynamics and their impact on real estate

Real estate underwriters who began their careers in the last decade—still a decently long tenure—do not have firsthand experience with interest rates much above 2-3%. Until recently, they haven’t experienced anything but tailwinds from historically low lending rates and cap rates. Underwriting loans in an environment with a 10-year treasury yield above 4% is quite different, and dealing with headwinds requires a different approach.

Therein lies the value of a multi-generational investment team. As investors in commercial real estate across multiple cycles, we assess multiple interest rate environments in our underwriting and exit analysis. In fact, it was our experience in previous cycles that led us to remain disciplined on our debt yield minimums to eliminate the noise of artificially low interest rates. As interest rates have increased to a more long-term average, that decision has served our clients well.

Advantage 3: A deep history of investing at all points along the risk spectrum

Gives us an in-depth understanding of the credit curve and ability to take advantage of market dislocations to maximize relative value for clients

Delivering value to our investors requires pursuing investments that will generate appropriate returns, while managing the associated risk. Doing that well requires deep experience across different cycles and investment strategies to understand where those opportunities might arise. Further, taking advantage of market dislocations requires having the capabilities and programs in place before the opportunity arises.

For example, as a result of making construction loans since 1996, we were well-positioned to take advantage of the market dislocation associated with banks’ recent commercial lending retrenchment and the resulting supply-demand imbalance for construction capital. We were able to capitalize on the opportunity and deliver attractive risk-adjusted returns for our clients.

Another example comes from the significant amount loan maturities coming to the market over the next few years. Many of these maturities represent high-quality, newly constructed assets that are not yet ready for permanent financing or asset sale. The fact that we have had bridge lending capacity since 1993 enables us to take advantage of this attractive risk adjusted lending opportunity. Without this capability already established, we would be playing catch-up and risk missing the most attractive opportunities that typically happen in the first 12-24 months of the credit cycle.
Real estate

Footnotes

As of 31 December 2024. Principal Real Estate became registered with the SEC in November 1999. Activities noted prior to this date above were conducted beginning with the real estate investment management area of Principal Life Insurance Company and later Principal Capital Real Estate Investors, LLC, the predecessor firm to Principal Real Estate Investors, LLC. Persistent inflation, continued uncertainty about the economic impact of Fed tightening, and failures including Silicon Valley Bank and First Republic Bank, contributed to a 47% decline in commercial lending activity in 2023 over 2022. At the same time, a $2 trillion wall of maturities created huge demand for capital. Learn more in Why it’s (still) a good time to invest in private real estate credit.
Disclosure

For Public Distribution in the United States. For Institutional, Professional, Qualified, and/or Wholesale Investor Use Only in other Permitted Jurisdictions as defined by local laws and regulations.

Risk Considerations

Investing involves risk, including possible loss of Principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate. Investments in private debt, including leveraged loans, middle market loans, and mezzanine debt, second liens, are subject to various risk factors, including credit risk, liquidity risk and interest rate risk. Incorporating alternative investments into a portfolio presents the opportunity for losses including the loss of your total investment. Also, some alternative investments have experienced periods of extreme volatility and in general, are not suitable for all investors.

Important information

This material covers general information only and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice. The information presented has been derived from sources believed to be accurate; however, we do not independently verify or guarantee its accuracy or validity. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that the investment manager or its affiliates has recommended a specific security for any client account.

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This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

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