The landscape of real estate finance is shifting under the weight of higher interest rates, constrained equity, and new entrants in the credit space. As the industry adjusts to a prolonged period of tighter liquidity and repriced risk, capital stacks are being reimagined reflecting both necessity and innovation.
This article explores the defining trends shaping capital formation in today’s market: the resurgence of debt, the rise of hybrid capital, and the creative structuring driving deals forward in an evolving financial climate.
Debt is Plentiful but at a Cost
Despite elevated rates, the commercial real estate debt markets are more competitive than we have seen in many years. Lenders are showing increased risk appetite across all asset classes particularly for high-quality projects backed by strong sponsors.
The critical factor is not the volume of available capital – especially given the growth of the private credit market -- but its willingness to accept specific risk profiles. Spreads remain wider than pre-2022 levels, reflecting a more cautious approach to underwriting and a heightened focus on deal fundamentals. However, over the past 6-9 months we have seen significant spread compression and relaxation of structure/covenants as lenders compete for the most attractive mandates.
At the same time, equity scarcity has continued to push sponsors to explore new layers of capital. Preferred equity has gained traction as an alternative to traditional LP equity, providing flexibility and control at a premium price. Yet gaps persist especially in ground-up development or transitional projects where traditional capital remains scarce. In short, liquidity is robust, but structure and cost are the defining variables.
The Rise of Hybrid and Structured Capital
With traditional LP equity constrained, subordinate and hybrid forms of capital such as mezzanine debt, structured or preferred equity, and stretch senior loans are taking center stage. These instruments serve as the connective tissue between more conservative senior lenders and the leverage Sponsors need to advance their projects without diluting ownership.
The boundaries between debt and equity are increasingly porous. Institutional credit platforms, insurance companies, and private credit funds are all competing across the same middle layers of the stack. Sponsors are gravitating toward streamlined, single-source financing solutions that can deliver flexibility and speed without complex multi-party negotiations.
In many cases, these hybrid structures are not just stopgaps, they’re creative solutions born from necessity. They allow projects to progress in markets where traditional LP equity remains scarce, while offering investors a tailored balance of yield, control, and risk.
Where Deals Break
Despite active credit markets, many transactions continue to struggle raising the required capital. The reasons are often structural rather than cyclical:
- Equity shortfalls: Projects may secure debt but fail to raise sufficient equity, often leaving gaps of 10-20% of the stack.
- Weak investment sales market: Business plans reliant on aggressive rent growth or cap rate compression are facing reality checks.
- Lease-up challenges: Properties delivering into softer markets are encountering stress, underscoring the need for flexible capital.
- Cost versus control: Sponsors are reassessing the trade-offs between capital cost and governance rights.
- Legacy leverage: Deals financed in the 2021–2022 era are now confronting maturity stress, forcing creative recapitalizations.
The current cycle rewards those who can navigate these pressure points with agility and structural sophistication.
The Road Ahead: Strategic Shifts in 2025 and Beyond
Looking forward, several themes are expected to define the next phase of real estate finance:
- Sector diversification: Beyond housing and logistics, capital is returning to select office, hospitality and adaptive reuse opportunities.
- New development momentum: With acute housing shortages nationwide, ground-up projects will increasingly rely on hybrid financing models until traditional LP investors come off the sidelines.
- Differentiated strategies: Investors are favoring niche, high-amenity, or infill concepts over commoditized multifamily formats.
- Underwriting discipline: The era of “priced-to-perfection” deals has ended; today’s underwriting demands downside resilience.
- LP capital on pause: Institutional LPs will likely re-enter gradually, while credit-based and hybrid solutions bridge the interim.
Strategic Takeaways
A few core principles emerge for navigating today’s market:
- Simplify capital structures. One stop solutions provide the most cost-effective and efficient execution.
- Build defensively but allow upside. Protective features like preferred returns or catch-ups can coexist with shared value creation.
- Segment risk with precision. Choose instruments mezzanine, pref, or hybrid based on sponsor quality and submarket dynamics.
- Stay realistic on returns. Modest growth assumptions and disciplined yield targets are the new norm.
- Lean into distress. Recapitalizations and restructurings will drive opportunity over the next 12–24 months.
- Don’t wait for traditional equity. Credit and hybrid capital will be the engines of near-term deal flow.
About Drew Fletcher
Drew Fletcher is President of Greystone Capital Advisors where he oversees a team of professionals responsible for arranging creative debt and equity solutions for institutional and private commercial property owners and developers, and provides strategic advisory services for institutions, investors and borrowers. GCA also focuses on large loan mortgage origination across Greystone’s best-in-class Fannie Mae, Freddie Mac, FHA, CMBS, Bridge, balance-sheet and special situation lending platforms.
The information provided in this article, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.