The Rise of the Real Estate Debt Fund

Over the past several years, as interest rates spiked and valuations declined, funds that invest in debt collateralized by real estate have become increasingly popular. Additionally, traditional lenders have retreated in connection with stricter regulations with Basel IV or Basel III endgame requirements in near sight. With this, real estate debt funds have only increased their capital raising and formed new fund strategies.

Citrin Cooperman’s Real Estate Industry Practice began seeing debt funds emerge in the early 2010s as a somewhat nuanced space. Fifteen years later, most funds starting up are looking to raise capital to invest in real estate debt instruments. Back in 2010, real estate groups were dipping their toes in what they thought was a puddle and are now fully emersed in an ocean of real estate looking to refinance.

Why Has the Debt Space Been So Successful?

Rising interest rates and market volatility have certainly played a role, but we believe there is credit due to the real estate managers who sought the opportunity to understand the collateral on a more sophisticated level than traditional bankers. The real estate players creating these private debt platforms saw the struggles of many traditional banks in 2023 and 2024, which resulted in heightened requirements, and are taking advantage of the void this has left in the financing of real estate deals. The more flexible terms and faster execution provided by private lenders have proven to fill this gap over the past two years.

What is even more interesting is that now you have the former borrower acting as the lender. What have they learned as borrowers? How many times did they say to themselves, “What would I have done if I were providing the financing for this property?”

Most debt funds we come across are started by real estate professionals. These former and existing borrowers were fast to recognize the shift in the economy and have the knowledge and experience to efficiently take stake in the debt market. In the market today, many traditional banks with mortgages aren’t excited about taking over the operations of an underwater or non-performing property. However, debt funds typically have a plan and understand the nuances of the asset before lending. They are putting themselves and their investors in a much more stable transaction versus the traditional lender. Additionally, due to valuation fluctuations over past years, most investors see debt funds as a much more stable investment as opposed to an equity investment in property.

What’s in Store for the Future?

With record mortgages maturing in 2026, new and larger debt funds with highly specific strategies are now forming. There was a significant increase in fundraising for debt funds in the first half of 2025 compared to the same period in 2024.

With interest rates falling in the fourth quarter of 2025, there may be a rise in valuations and compression in yield for debt funds. Despite this, given the skill and knowledge of these private investors, there will likely be a shift in strategies to align with the market. With less restrictions than that of a traditional bank, debt funds will be able to react faster and smarter with perhaps floating rate loans to mitigate the yield compression or more open end/evergreen funds to provide flexible cash flows for their investors.

Overall, with what seems to be endless strategies for private funds, new restrictions on traditional lenders, and institutional investors supporting the space, it appears private debt fund managers will be busy for the next decade. These factors provide a limited barrier to entry, and a true risk-adjusted alternative to what has been a volatile market since 2020. The market was never running low on opportunities for real estate investments; it was only stalled briefly while determining how to finance them.

How Citrin Cooperman Can Help

Citrin Cooperman’s prominent Real Estate Industry Practice is a leading resource to many real estate debt funds. Reach out to Keith Rennard or your Citrin Cooperman professional to learn more about how we can support your real estate debt fund.