Private Real Estate: Attractive Values—and Yields

Key Points  

• Private real estate credit is offering a premium relative to other fixed-income products. While interest rates have moved lower due to recent Fed cuts, they are still elevated compared with the trailing five-year average, while real estate credit spreads remain elevated.
• Underlying property values are still below recent highs. This suggests an attractive entry basis for lenders.
• Long-term interest rates remain elevated.⁵ While short-term rates have come down slightly, long-term rates, which more directly impact real estate lending, remain elevated. Long-term rates are more sensitive to economic data, such as consumer spending and jobs reports, which are more likely to influence these medium- to long-term fixed rates than short-term interest-rate reductions.
• Positive outlook for transaction activity. As interest rates move lower, cash flow coverage increases, bringing down loan loss reserves for banks. Higher reserves can then be put back into the market and facilitate more commercial real estate lending and deal flow. Historically, greater transaction activity, after a lag, has led to higher property values over the long term.

Supportive Environment for Private Real Estate Debt

Given the potential for increasing volatility in global markets, strong current income from real estate debt can provide an attractive risk-adjusted option in investors’ portfolios, with the added benefit of hard-asset collateral.

To explore why, let’s take a look back at the interest-rate and macro backdrop first. In the period from 2022 to 2024, interest rates rose and property values fell (Figure 3). This created opportunities to lend against commercial real estate (CRE) properties priced below their intrinsic value, thereby generating yield at an attractive basis.

It also created a sizable funding gap, as lower real estate values and higher interest rates have reduced debt capacity, providing the opportunity for private lenders to originate debt and helping borrowers finance legacy capital structures.

Low property values and high interest rates have created the opportunity for lenders to generate yield at an attractive basis. Lenders have benefited from elevated rates in recent years, while today’s low values provide lenders with a cushion against potential loss. This is because lenders will be advancing less against current property values and, as a result, have a lower dollar basis, or exposure, against the underlying collateral property.

Loans originated at today’s property values are potentially protected from further value declines and should benefit from future value recoveries. Should property values decline further, loans originated at a discounted basis may benefit from the equity cushion ahead of their position. Conversely, as property values recover, today’s lenders would benefit from lower loan-to-value ratios, providing some safeguard from potential loss.

The combination of elevated interest rates and significantly reduced liquidity in the CRE debt capital markets has caused many borrowers to struggle to meet their debt service payments over the past two years, resulting in widespread extensions of loan maturities. There is still a significant amount of debt coming due that will need to be refinanced.

The trajectory of CRE debt maturities has continued to climb, with nearly $2T in maturities expected through the end of 2026, according to S&P Global. That surge of upcoming maturities with challenged capital structures will require financing at an attractive cost of capital and should provide a wide range of investment opportunities for private lenders.

The Real Estate Debt Advantage

Compared with real estate core equity, real estate debt has demonstrated consistent returns across cycles. During recent real estate value corrections, lenders’ positions were largely insulated from loss (outside of the office sector). Ultimately, private real estate credit provides an opportunity to seek consistent risk-adjusted returns while benefiting from the security of an equity cushion at the top of the capital structure.

Private real estate credit’s uncorrelated returns to core real estate equity illustrates the diversification benefits the asset class can provide to portfolios, which are arguably even more valuable in times of volatility.¹

To find attractive return opportunities with reduced downside risks, we believe managers should use an equity lens to assess the underlying value. Managers that have comprehensive credit analysis capabilities and in-house operating platforms are well positioned to deliver many of the benefits of commercial real estate credit to investors, in our view.

Summing Up

In today’s volatile market environment, there is a compelling case for increasing allocations to private real estate credit, especially given its similar long-term return profile to core equity—with less downside risk. Amid market uncertainty, investors could benefit from elevated interest rates, high real estate spreads and low property values, all of which may position the real estate credit investor to potentially receive consistent, strong income yields for less risk than in prior cycles.

Read more in our Alts Quarterly Q4 2025.

ENDNOTES

¹ Diversification does not ensure a profit or protect against loss.

⁵ Federal Reserve Bank of St. Louis, as of September 30, 2025.

A WORD ABOUT RISK

As an asset class, private credit comprises a large variety of different debt instruments. While each has its own risk and return profile, private credit assets generally have increased risk of default, due o their typical opportunistic focus on companies with limited funding options, in comparison with their public equivalents. Because private credit usually involves lending to below-investment-grade credit assets is increased in return for taking on increased risk.

Investments in real estate-related instruments may be affected by economic, legal or environmental factors that affect property values, rents or occupancies of real estate.

Infrastructure companies may be subject to a variety of factors that may adversely affect their business, including high interest costs, high leverage, regulation costs, economic slowdown, surplus capacity, increased competition, lack of fuel availability and energy conservation policies.

Alternative investments often are speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment. High-yield bonds are subject to interest-rate risk. When interest rates rise, bond prices fall; generally, the longer a bond’s maturity, the more sensitive it is to this risk. Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.

The information in this publication is not and is not intended as investment advice, an indication of trading intent or holdings, or a prediction of investment performance.

Diversification does not guarantee a profit or protect against loss. The views and information expressed herein are subject to change at any time. Brookfield disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources; however, Brookfield does not warrant its completeness or accuracy.

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KEY TERMS AND INDEX DEFINITIONS

Bloomberg Global Aggregate Index is a market-capitalization-weighted index comprising globally traded investment-grade bonds. The index includes government securities, mortgage-backed securities, asset-backed securities and corporate securities to simulate the universe of bonds in the market. The maturities of the bonds in the index are more than one year.

Bloomberg U.S. Corporate High Yield Bond Index measures the USD-denominated, high-yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below.

Cliffwater Direct Lending Index (CDLI) seeks to measure the unlevered, gross-of-fee performance of U.S. middle-market corporate loans, as represented by the asset-weighted performance of the underlying assets of business development companies (BDCs), including both exchange-traded and unlisted BDCs, subject to certain eligibility requirements.

FTSE EPRA Nareit Developed Real Estate Index is an unmanaged market-capitalization- weighted total-return index that consists of publicly traded equity REITs and listed property companies from developed markets.

FTSE Global Core Infrastructure 50/50 Index gives participants an industry-defined interpretation of infrastructure and adjusts the exposure to certain infrastructure subsectors.

The constituent weights are adjusted as part of the semi-annual review according to three broad industry sectors: 50% Utilities; 30% Transportation, including capping of 7.5% for railroads/railways; and a 20% mix of other sectors including pipelines, satellites and telecommunication towers. Company weights within each group are adjusted in proportion to their investable market capitalization.

Green Street Commercial Property Price Index (CPPI) is a time series index published by Green Street, which tracks the value of U.S. commercial real estate properties. The index is based on transaction prices and appraisals of institutional-quality properties across major sectors, including office, industrial, retail and multifamily. It is widely used as a benchmark for changes in commercial property values over time.

ICE BofA Single-B U.S. High Yield Index tracks the performance of USD-denominated below-investment-grade corporate debt publicly issued in the U.S. domestic market, including all securities with a given investment-grade rating of B.

ICE BofA U.S. Convertibles Index tracks the performance of convertible bonds in the U.S.

ICE BofA U.S. High Yield Constrained Index measures the performance of USD-denominated, non-investment-grade, fixed-rate, taxable corporate bonds.

J.P. Morgan CLO Post-Crisis BB Index is a subset of the J.P. Morgan CLO index that only tracks the BB-rated CLO.

J.P. Morgan Emerging Markets High Yield Bond Index tracks liquid, U.S.-dollar emerging market fixed- and floating-rate debt instruments issued by corporate, sovereign and quasi-sovereign entities.

MSCI World Index is a free-float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets.

Nasdaq Index is a market-cap-weighted index tracking companies traded on the Nasdaq stock market.

Preqin Infrastructure Index captures in an index the return earned by investors on average in their private infrastructure portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter.

Preqin Private Equity Index captures in an index the return earned by investors on average in their private equity portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter.

Preqin Real Estate Index captures in an index the return earned by investors on average in their private real estate portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter.

S&P 500 Index is a market-cap-weighted equity index of 500 widely held, large-capitalization U.S. companies.

S&P UBS Leveraged Loan Index measures the market-value-weighted performance of the investable universe of USD-denominated leveraged loans.

Secured Overnight Funding Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. Published by the Federal Reserve Bank of New York, SOFR is based on actual transactions in the U.S. Treasury repurchase (repo) market and is considered a reliable benchmark for short-term interest rates. SOFR has replaced LIBOR as the preferred reference rate for many financial contracts.

World Bank Global Supply Chain Stress Index (GSCSI) is an indicator developed by the World Bank to measure disruptions and stress in global supply chains. The index aggregates data on container shipping volumes, costs and delays, providing a quantitative assessment of supply chain bottlenecks and their impact on global trade. It is used to monitor trends and shocks affecting international logistics and manufacturing.

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