Capital markets

Lower Interest Rates Spark Commercial Real Estate Recovery, Private Lenders Step In

Editorial staff

Editorial staff

— 2 min read
Lower Interest Rates Spark Commercial Real Estate Recovery, Private Lenders Step In
Photo by Samuel Regan-Asante / Unsplash

Private lenders like Marathon Asset Management see new investment opportunities in commercial real estate (CRE) as interest rates fall, according to CEO Bruce Richards.

Why it matters:

Lower rates have improved financing conditions, especially for nonbank lenders, after years of slow CRE growth following the pandemic's impact on office space demand. Marathon, which had previously stayed clear of CRE, now sees a bottom in the market and expects a gradual recovery.

  • “CRE has set its bottom. The worst is over,” said Richards.

The big picture:

Last month, the Federal Reserve cut rates by 0.5%, signaling more cuts ahead. The shift is expected to ease financing costs on CRE loans maturing in the next three to four years, boosting net operating income and cash flow.

  • Cap rates (a key risk metric) will likely remain steady, limiting sharp value increases and slowing the CRE recovery pace.
  • Richards forecasts a "slow grind" instead of a V-shaped rebound, with cap rates tied to 10-year Treasury rates, holding at around 4%.

What they’re saying:

Richards predicts additional rate cuts and no recession in 2025, driving a decrease in default rates for bank loans, high-yield bonds, and private debt over the next 12 months.

  • CRE loan defaults are expected to drop to 1.5%-2%, leading to fewer distressed assets but continued demand for capital in the sector.

By the numbers:

  • With banks holding $2 trillion in CRE loans but reducing exposure, there’s a $5.6 trillion “maturity wall” that private lenders like Marathon are stepping in to address.
  • Private credit, now a $1.7 trillion asset class, is expanding its role in CRE.

Deals and investments:

Marathon recently agreed to finance major projects, including a $210 million deal for The Ritz-Carlton Dallas and over $180 million for a senior living facility in London.

  • As private equity activity picks up alongside the Fed's easing cycle, leveraged buyout (LBO) financing is also creating more opportunities for private credit.

The bottom line:

With banks scaling back on CRE exposure, private lenders are positioned to fill a crucial funding gap in the CRE sector, especially in deals under $250 million. While banks compete for large transactions, private credit is set to thrive in smaller, high-value investments as rates continue to decline.

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