Private real estate credit is currently an attractive investment opportunity due to reduced supply from traditional lenders and growing demand driven by a wave of loan maturities. High interest rates and favorable market conditions have created wider spreads, higher yields, and new opportunities for fresh investments, making it a strategic time to consider allocating capital to this sector.
Private real estate credit presents compelling opportunities today due to several market dynamics. With traditional lenders pulling back from the commercial real estate market and demand rising—fueled by approximately $2 trillion in loans maturing over the next three years—the conditions have created a lender’s market. High interest rates have driven capitalization rates higher, offering new opportunities for investments with fresh equity buffers and lower exposure levels.
The ongoing capital gap remains, driven by pressures on the banking sector, economic uncertainty, and regulatory scrutiny. Since 2022, commercial lending has sharply declined, with banks leading the pullback. This reduced supply, coupled with increasing demand, has led to wider spreads and higher yields for lenders.
Looking ahead, private real estate credit is well-positioned to benefit from these favorable conditions. High capitalization rates mean lower valuations, which allow new investments to reset values and achieve attractive returns. With no signs of aggressive Federal Reserve rate cuts, the current high rates support outsized yields, reinforcing the belief that it remains a good time to invest in private real estate credit. Historically, credit investments made after periods of market turmoil have offered the best risk-adjusted returns, and the expanding role of private lenders signals continued growth in this sector.
For a deeper dive into the continued attractiveness of the asset class, read Why it’s (still) a good time to invest in private real estate credit.
Disclosure
Investing involves risk, including possible loss of Principal. Past Performance does not guarantee future return. 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. Private credit involves an investment in non-publicly traded securities which are subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss. Investments in Private Credit may also be subject to real estate-related risks, which include new regulatory or legislative developments, the attractiveness and location of properties, the financial condition of tenants, potential liability under environmental and other laws, as well as natural disasters and other factors beyond a manager’s control.
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, 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.
Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc.
Securities are offered through Principal Securities, Inc., 800-547-7754, Member SIPC and/or independent broker/dealers.
Principal Asset Management leads global asset management at Principal.®
For Public Distribution in the U.S. For Institutional, Professional, Qualified and/or Wholesale Investor Use only in other permitted jurisdictions as defined by local laws and regulations.
© 2024, Principal Financial Services, Inc. Principal Asset ManagementSM is a trade name of Principal Global Investors, LLC. Principal®, Principal Financial Group®, Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc.
3851622