Originally published Jan. 22, 2024
Quick Take: Private multifamily credit funds are filling financing gaps as banks retreat under Basel III regulations and tighter lending standards. These funds offer capital through senior mortgages, subordinate debt and preferred equity. This is giving investors access to resilient housing demand, risk-adjusted returns, and diversification opportunities. And it supports multifamily borrowers seeking non-bank solutions.
Elevated interest rates and tighter lending standards have made capital more difficult to obtain from traditional debt markets. But private credit is creating solutions for borrowers—and opportunities for investors. In the multifamily real estate space, regional banks have been a primary source of financing in recent years. But with many banks taking a conservative approach, private credit is filling the gap and helping to finance projects. This is giving investors the potential to capture risk-adjusted returns that compare favorably with many traditional fixed-income alternatives.
Loan securitization markets are experiencing ripple effects from the broader lending environment as well. For example, commercial banks and government-sponsored entities (GSEs) pool multifamily loans to create commercial mortgage-backed securities (CMBSs) and collateralized loan obligations (CLOs). As banks and GSEs have adopted more conservative underwriting standards, the credit quality and profitability of these securitizations have generally improved, according to Fitch Ratings.
From Pandemic-Era Growth to Capital Crunch
In 2021 and 2022, after the height of the COVID-19 pandemic, demand for multifamily properties surged. That resulted in many sponsors purchasing value-add, older-vintage properties at or above replacement cost. This demand was fueled by rock-bottom interest rates, as well as the expectation that rent increases of 5% to 10% year-over-year—typical at that time—would continue. As low interest rates persisted, investors had to choose between accepting lower returns or taking on more risk during a time of peak valuations.
The zero-interest-rate policy, prevalent for much of the past 15 years, ended abruptly in early 2022. Rising inflation prompted the Federal Reserve to begin a series of rapid interest rate hikes. The ensuing credit contraction limited capital market activity across the commercial real estate (CRE) sector, which in turn made it more difficult to discern property valuations. In multifamily, a wave of new apartment deliveries hit in 2023 and 2024, but absorption was stronger than expected. According to Brookings, the U.S. housing market was short nearly 4.9 million housing units as of 2023, highlighting the extent of unmet demand. More recently, new construction has declined, and the cost of homeownership has risen: Owning a home now costs about $1,200 more per month than renting (see chart below).
Sources: Newmark Research, Atlanta Federal Reserve (July 8, 2025)
Basel III Shifts CRE Lending from Banks
As Brookings explains, Basel III regulations are reshaping the credit environment by requiring banks to hold more capital against certain types of loans, including commercial real estate. This makes it more expensive and less attractive for banks to extend credit directly, especially in the real estate sector. As a result, nearly $1.2 trillion in commercial real estate debt set to mature by 2030 will increasingly need to be refinanced outside of traditional bank channels, according to Newmark (see chart below).
Sources: MBA, Trepp, RCA, Newmark Research as of July 7, 2025. Adjusted for year-to-date estimated loan originations.
Overview of the Private Credit Market
Private credit is commonly associated with non-bank institutions making loans to private companies or acquiring loans on the secondary market. However, private credit spans many asset classes and encompasses a wide range of strategies, including direct lending, distressed lending and mezzanine-level financing, among others. With this type of flexibility across the capital stack, lenders can provide customized solutions with varying levels of risk and return potential.
Mapping Opportunities in Multifamily Lending
The primary lending base of the multifamily credit market includes banks and GSEs. The largest multifamily private credit providers, such as debt funds, insurance companies and mortgage REITs, make up the rest of the lending base. While private credit includes a wide range of strategies, three structures stand out as opportunities: senior mortgages, subordinate secured positions and preferred equity.
Senior mortgages: Senior mortgages are considered the lowest-risk position in the capital structure. They are first lien—ahead of other creditors to receive repayment. And they have a priority claim on all assets, including a property’s cash flow, in the event of default. This type of capital protection comes with lower returns than those that might be offered with high-yield, subordinated debt products. However, traditional financing for transitional assets such as a value-add or ground-up development projects has become more difficult to obtain.
Prior to the Federal Reserve’s shift in interest rate policy in early 2022 and five U.S. bank collapses in 2023, loan proceeds would be 60% to 70% of total project costs. Today, loan proceeds generally may be 50% to 55%. And many banks now require a loan guarantee or a pledge of deposits. This opens the door for private lenders with multifamily expertise to provide an alternative by offering better loan terms in exchange for a higher interest rate.
The Role of B-Pieces, K-Series Certificates and Preferred Equity
Subordinate secured positions: Subordinate secured positions are also known as B-notes or B-pieces. They are a tranche within a securitized investment such as CMBS product or CRE-CLO. B-notes are part of the first mortgage, meaning there’s only one mortgage payment from the borrower’s perspective. In the event of default, B-notes are paid after A-notes. And they carry higher return potential for this additional level of risk.
Freddie Mac K-Series certificates (K-bonds) are an example of a CMBS product. They features loan pools where 90% or more of the loans are secured by stabilized, cash-flowing, multifamily properties that are moderately leveraged. According to Freddie Mac, 99.6% of K-deal loans are current. These securities allow investors to acquire diversified pools of loans with significant capital protection.
Preferred equity: Preferred equity has debt-like characteristics. It sits in a protected position behind common equity holders. And it earns income that equals or can exceed the expected returns being received from common equity today. In a typical preferred equity real estate deal, lenders contribute 60% of the capital stack. And they earn the right to be repaid first. The preferred equity owner holds up to 20% of the financing and is next in line for repayment. The remaining capital is in common shares. With this capital stack, if a $100 million deal loses $20 million, preferred shareholders receive full repayment of their invested equity and common shareholders bear the entire loss.
Private Credit’s Expanding Role in Multifamily Finance
For investors, private credit investments are designed to do three things: protect capital, generate consistent cash flows, and reduce volatility compared to equity investments. These qualities are particularly relevant in multifamily real estate, which has other specific attributes:
- Resilient asset class: Housing is a basic need, unlike office or retail, two sectors that have faced disruption.
- Rental income advantage: Shorter lease terms (six to 12 months) allow landlords to reset rents and capture growth.
- Government backstop: According to the Mortgage Bankers Association, 41% of multifamily lending volume went to Fannie Mae and Freddie Mac in 2024, ensuring liquidity.
Constraints imposed on traditional banks by the Basel III regulations, combined with strong housing demand and affordability challenges, create a rare moment for private credit investors. They have the ability to step into deals that historically would have been financed by banks, often on terms that are better for investors and lenders—such as higher yields, stronger covenants, and lower leverage—resulting in stronger risk-adjusted return potential. For borrowers, these terms may be more expensive, but they provide access to capital that might otherwise be unavailable.
Private credit is playing an increasingly important role in today’s capital markets. In the multifamily sector, it helps bridge financing gaps left by banks and other traditional lenders. And it offers structures that can balance risk and return in different ways. As regulations and market dynamics evolve, private credit is likely to remain a key source of funding, providing borrowers with needed capital and investors with a tool for portfolio diversification.