Banks Turn to Private Equity Firms for CRE Lending

According to Bisnow, the new Basel III Endgame regulation requires banks with over $100B in assets to hold significantly higher reserves to reduce risk-taking by banks. By raising the cost of direct CRE lending, the rules have pushed banks to offload risk to private equity firms and other non-bank lenders.

According to CBRE, banks accounted for just 18% of loan origination in Q324, a dramatic decline from 38% a year earlier. Meanwhile, alternative lenders took the lead, originating 34% of closed non-agency loans, up from 27% in 2023.

Private Equity Takes Center Stage

Private equity firms, traditionally borrowers of bank funding for leveraged buyouts, are now key intermediaries in CRE lending. Industry leaders acknowledged this evolving relationship at a recent Bisnow event in NYC.

Fortress (FIG) Managing Director Steven Parrinello noted, “Banks want to finance guys like me, have me do the direct lending because that’s what regulators are forcing them to do.”

Brian Haber, Managing Director at PCCP, explained that banks now favor structures like warehouse lines and repo agreements to lend indirectly to private equity firms, enabling compliance with Basel III while still participating in CRE financing.

Industry Concerns and Criticism

Banking executives have criticized the new regulations, arguing they reduce profitability and could shift lending activity to less-regulated markets. Jamie Dimon, CEO of JPMorgan Chase (JPM), warned that Basel III might increase systemic risks by driving financial activity out of sight of regulators.

Goldman Sachs (GS) CEO David Solomon added that higher reserve requirements could harm small businesses and pension funds by limiting bank lending abilities.

Despite these concerns, a Fitch Ratings report found that the Basel III rules are unlikely to harm bank credit profiles while bolstering the banking system’s overall resiliency.

The Bigger Picture for CRE

The growing role of private equity in CRE signals a major transformation in financing strategies. Debt funds and alternative lenders are poised to dominate as traditional bank activity wanes.

“By having [private equity] go out and do the loan and then financing [those loans], they’ve essentially created the same structure, just backwards,” Dansker Capital Group CEO Andrew Dansker said, summing up the irony of the new lending paradigm.

As Basel III reshapes the financial landscape, expect private equity to entrench itself in CRE even more, extending its influence across data centers, infrastructure, and even niche sectors like parking lots. This shift may redefine how risk is managed and who controls the flow of capital in the market.