The commercial real estate financing landscape is in the midst of a meaningful recalibration. Banks have re-entered the market after a period of heightened caution, but their lending posture remains disciplined and selective. Regulatory capital requirements, balance sheet considerations and a continued focus on risk management mean that certain segments — particularly construction, development and transitional assets — still face constrained access to traditional bank capital.
At the same time, private credit has continued to mature and expand its role. In particular, alternative lenders, through debt funds and other investment vehicles, have evolved into consistent, reliable sources of capital, helping borrowers navigate a market defined by selective underwriting and heightened scrutiny. What is emerging is not a replacement of banks by alternative lenders, but a more balanced and collaborative financing ecosystem that better reflects today’s market realities.
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The data illustrates the scale of this shift. According to PGIM and MSCI, non-bank lenders now account for roughly half of all new U.S. construction lending, a sharp increase from less than 25 percent in 2019. This growth reflects both structural and cyclical forces. As banks operate within tighter regulatory and capital frameworks, alternative lenders have been able to provide flexibility, speed and customized solutions for projects that may not fit neatly within traditional lending parameters.
This dynamic is especially evident in development and value-add strategies. Moderate loan-to-value thresholds at banks have created funding gaps for many high-quality projects. Investment managers — through debt funds and other vehicles, including separate accounts — are increasingly stepping in to bridge that gap, providing capital that sits between senior bank loans and sponsor equity. At times, this private capital is taking the place of institutional equity, which has been less active over the last few years. In doing so, these alternative lenders are enabling sponsors to execute business plans while maintaining prudent capital structures.
Importantly, this is not a competitive zero-sum environment. In practice, banks and alternative lenders are often working together. Co-lending and syndicated structures have become more common, allowing banks to manage exposure while continuing to support long-standing client relationships. Private lenders, in turn, can complement bank capital by providing incremental leverage or structural flexibility.
This partnership-driven approach results in more diversified capital stacks that combine the strengths of both sides: the pricing efficiency and balance sheet stability of banks alongside the adaptability and execution certainty of private credit. For borrowers, this collaboration expands access to capital and reduces execution risk in an increasingly complex market.
The role of private credit is also expanding alongside rising demand for value-add investment. Aging real estate stock across major markets is driving sustained need for modernization, repositioning and ESG-related upgrades. These projects often involve transitional cash flows or near-term capital expenditure requirements that fall outside traditional bank underwriting comfort zones.
Private capital has proven well suited to address these needs. Fundraising momentum for CRE value-add strategies has remained robust, reflecting sustained investor demand for private credit and the attractive risk-adjusted returns it can offer. That capital is being deployed into assets where disciplined underwriting and active asset management can drive long-term value creation.
Looking ahead, the rebalancing between banks and alternative lenders appears durable. PGIM forecasts indicate that banks’ share of total construction lending is expected to remain below 40 percent through 2027, even as interest rates stabilize. Regulatory capital considerations and continued investor appetite for private credit suggest this is a structural evolution rather than a temporary market response.
Just as important, this evolution is underscoring the increasingly central role alternative lenders play in shaping disciplined, resilient capital structures. As traditional lenders remain focused on regulatory constraints and balance sheet considerations, alternative lenders are helping sponsors navigate complexity with flexible solutions grounded in rigorous underwriting.
Today’s leading private lenders are not simply providing incremental leverage — they are acting as strategic partners, bringing asset-level insight, structuring expertise and a long-term perspective that supports thoughtful risk allocation. In doing so, alternative lenders are enabling capitalization strategies that balance execution certainty with durability, reinforcing market stability rather than excess.
A more diversified lending environment ultimately supports a healthier real estate market. It reduces reliance on any single source of capital, encourages thoughtful deal structuring and provides sponsors with multiple pathways to financing. Banks can continue to anchor the senior market, while investment managers through their debt funds and separate accounts provide the flexibility and leverage required to execute more complex strategies.
For borrowers, success in this environment depends on understanding how these capital sources work together. The most effective financing strategies recognize banks and private lenders as complementary partners, each playing a distinct role within the capital stack.
As this balance continues to take shape, the result is a financing ecosystem that is more resilient, more adaptable and better aligned with the realities of today’s market — one capable of supporting both near-term execution and long-term growth.
Melissa Farrell is a managing director and the head of U.S. debt originations at PGIM Investments. Jaime Zadra is a managing director at PGIM Real Estate.