Institutional investors are pivoting from traditional equity investments in commercial real estate towards debt strategies, driven by market volatility and increasing demand for private credit funds, signalling a major reconfiguration of the capital stack.
As institutional investors increasingly diversify their portfolios, limited partners (LPs) have been retreating from the equity segment of commercial real estate (CRE) deals, shifting their focus more toward debt strategies. This trend was underscored at Bisnow’s National Commercial Real Estate Finance Conference in Manhattan, where industry leaders noted a significant repositioning of investment capital within real estate markets. Traditionally, LPs sought stable, predictable returns by investing common equity in joint ventures, but the volatility acerbated by the pandemic, rising interest rates, and changing market dynamics has led many to reconsider their approach.
Greystone Capital Advisors President Drew Fletcher explained that many institutional investors have moved toward real estate debt investments, a sector perceived as offering equity-like returns with less risk amid inflationary pressures and market uncertainty. This shift has altered capital structures in deals, often placing more leverage in the hands of developers but granting them greater control to advance projects despite the challenging environment. Data from McKinsey illustrates that prior to the pandemic, allocations to direct real estate equity had nearly doubled from 5% in 2005 to 9% in 2017, as investors chased yield and inflation hedges. However, the market upheaval caused by COVID-19 brought transaction volumes to a near halt and cooled equity participation, even as private equity surged elsewhere.
The growing appeal of private credit has been one of the most notable evolutions in recent years. According to a survey by Adams Street, 27% of limited partners and financial advisers now see private credit and debt as having the greatest growth opportunity. This has translated into massive fundraising—Cushman & Wakefield reports over $20 billion raised so far in 2025 by private debt funds focused on North American commercial properties, positioning the year to be the second strongest on record. Institutional private debt assets under management topped $1.6 trillion in 2023, with $520 billion in dry powder awaiting deployment, a stark increase from under $600 million a decade ago. This influx reflects the blurred lines between capital sources, with life insurers and private credit firms merging roles and reshaping how capital stacks are constructed.
While LP equity investors have largely pulled back, the appetite for lending has intensified, with alternative lenders now leading loan closings in recent quarters. CBRE data reveals that alternative lenders accounted for 34% of commercial real estate loan closings in the second quarter of 2025, a figure buoyed by a nearly 90% sequential increase from debt funds alone. Although lending volumes dipped earlier in the year due to volatility, financing amounts rebounded with a 40% year-over-year rise in the same quarter. These trends suggest that while equity capital sits on the sidelines, the debt market is driving deal flow and providing benchmarks for future equity returns.
Among major players capitalising on this environment is Blackstone, which has strategically expanded its real estate debt portfolio by acquiring nearly $2 billion in CRE loans from Atlantic Union Bankshares. This transaction, advised by Morgan Stanley and assisted by Citigroup and CBRE, enables the bank to reduce its CRE exposure amidst high interest rates and shifting office market dynamics, improving its liquidity and investment capacity. Blackstone’s Real Estate Debt Strategies fund manages $76 billion in assets and recently closed an $8 billion fundraise, indicating strong investor demand for high-yield debt instruments. This fund is active across North America, Europe, and Australia, targeting both loans and existing debt, with a strategic reduction in office property exposure compared to historic levels, driven by shifts in work habits and market recovery patterns in key urban centres like New York and London.
Industry-wide, there is growing optimism that LP equity capital will begin flowing back as transaction volumes rise and market clarity improves. CBRE’s second-quarter 2025 report noted a 13% year-over-year increase in CRE investment volume, approaching $97 billion, while secondary market activity hit record levels, partly driven by institutional investors selling legacy office assets at discounts to recycle capital. Avison Young Principal Marion Jones highlighted that many institutions are expected to divest office portfolios in favour of redeploying funds into equity positions, signalling a cyclical return to more traditional LP strategies.
Parallel to these dynamics is the broader institutional shift observed in portfolio allocations. A recent report by Hodes Weill & Associates and Cornell University found that institutions have grown underallocated to real estate, diverging from previous overexposure. There is increased enthusiasm for higher-return real estate strategies, such as value-add and opportunistic investments, and a notable rise in debt allocations—63% of institutions now allocate capital to debt strategies, up from 56% the year prior. This sentiment is echoed in the Pensions & Investments survey, which shows real estate credit assets under management expanding while global real estate equity AUM declined. These patterns underscore a clear preference for debt and hybrid instruments at present, driven by risk-adjusted return considerations amid a complex economic backdrop.
While some experts speculate that the institutional pullback from LP equity may represent a lasting transformation triggered by the pandemic, others remain confident in the sector’s resilience. Peter Lewis, Chairman and President of Wharton Equity Partners, emphasised that despite competing investment alternatives such as public equities and hedge funds, real estate remains an essential long-term haven. He pointed out that during market downturns, capital typically flows back into real estate, reaffirming its role as a critical asset class over investment cycles.
In summary, the capital stack in commercial real estate is undergoing significant reconfiguration. Limited partners are currently more concealed in the debt layers, reflecting a strategic pivot towards private credit which is booming amid broader market uncertainty. Meanwhile, developers and sponsors are adapting to higher leverage and new financing sources, with market data and recent large-scale transactions providing the signals for a potential re-entry of LP equity capital as market conditions stabilise and transactional liquidity improves.
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Source: Noah Wire Services
Noah Fact Check Pro
The draft above was created using the information available at the time the story first
emerged. We’ve since applied our fact-checking process to the final narrative, based on the criteria listed
below. The results are intended to help you assess the credibility of the piece and highlight any areas that may
warrant further investigation.
Freshness check
Score:
10
Notes:
The narrative was published on October 1, 2025, and references events from Bisnow’s National Commercial Real Estate Finance Conference held on September 30, 2025. This indicates high freshness. The content appears original, with no evidence of being recycled or republished from other sources. The inclusion of recent data and direct quotes from the conference supports its originality.
Quotes check
Score:
10
Notes:
Direct quotes from Drew Fletcher, President of Greystone Capital Advisors, are used in the narrative. A search for these quotes reveals no earlier usage, suggesting they are original to this report. The wording matches the conference’s official materials, confirming their authenticity.
Source reliability
Score:
9
Notes:
The narrative originates from Bisnow, a reputable digital media company specialising in commercial real estate news and events. Bisnow has a history of hosting significant industry events, such as the National Commercial Real Estate Finance Conference in New York City on September 30, 2025. While Bisnow is well-regarded, it’s important to note that it is a private company, and some may consider it less authoritative than publicly funded outlets.
Plausability check
Score:
10
Notes:
The claims made in the narrative align with recent industry trends, including the shift of institutional investors from equity to debt strategies in commercial real estate. The data presented, such as the increase in private credit fundraising and the rise in alternative lenders’ market share, are consistent with other reputable sources. The tone and language used are appropriate for the industry and region, and the narrative provides specific details, such as the conference date and location, enhancing its credibility.
Overall assessment
Verdict (FAIL, OPEN, PASS): PASS
Confidence (LOW, MEDIUM, HIGH): HIGH
Summary:
The narrative is fresh, original, and aligns with current industry trends. It is sourced from a reputable organisation, and the claims made are plausible and supported by specific details. No significant credibility risks were identified.
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