Debt Markets, Credit Facilities Propel Commercial Real Estate Growth

Jan 23, 2025

Real estate provides a viable pathway for global investment growth in a volatile macroeconomic landscape. As detailed in the Commercial Observer in September 2024, senior debt markets center on debt and obligations prioritized for repayment should default or bankruptcy occur. Collateral backs them, which assures returns, even in insolvency. By contrast, subordinated debt typically has higher interest rates because it has higher risk related to its lower payback priority.

Senior debt markets are complex and evolving. Banks’ conservative approaches have avoided the pitfall of broad non-performing loan (NPL) portfolios, which were a major contributor to past financial crises. NPLs present high risks since they contain large amounts of collateralized debt, making them difficult to identify. Manageable single-asset loans often contain distressed assets. While traditional commercial mortgage-backed securities (CMBS) can pool 50 to 100 loans, single-asset, single-borrower (SASB) loans represent single large loans for one property, which investors can buy on the secondary market after securitization.

At the same time, lenders are taking a collaborative approach, flexibly working with sponsors to achieve refinancings and property sales rather than exacting harsh penalties such as foreclosure and bankruptcy.

Structured capital solutions (investments with debt and equity-like features) are a related way of combining debt and equity capital in ways that enable sponsors to bridge gaps across stretch senior loans and mezzanine loans. The latter represents business loans with tailored repayments to company cash flows. Professionals calculate existing loan balances against (often lower) permanent loan proceeds taken in, which helps ensure liquidity and mitigate rises in overall capital costs.

Real-world examples abound across Texas. In September 2024, Dallas-based Invitation Homes, Inc. announced it had closed a senior unsecured credit facility valued at $3.5 billion. It replaced the previous existing facility and reduced debt costs. The facility spans a fully funded $1.75 billion term loan and a $1.75 billion revolving line of credit (revolver), with the final maturity date set for September 2029. With the $1.75 billion revolver replacing an existing $1 billion revolving line of credit, this boosts balance sheet flexibility and liquidity as the real estate firm positions itself to take full advantage of emerging growth opportunities.

Debt financing’s rise also reflects trends of US interest rates peaking and positioned for a medium-term decline. This makes debt more attractive, as loans do not accumulate interest as quickly. This, in turn, generates renewed bank investments in the capital markets, as borrowers are less likely to accumulate unrepayable levels of debt.

For example, JLL Capital Markets successfully arranged an April 2024 construction loan of $290 million to support the 500,000-square-foot Class AA office tower Parkside Uptown. The project should reach completion in 2027, with funding involving a floating-rate four-year loan arranged through the Goldman Sachs Alternatives’ Real Estate Group. When the loan closed, Bank of America had already completed pre-leasing for nearly half of the available office space. It indicates a high demand for office space in uptown Dallas.

Another growth driver in US commercial real estate markets is inbound investment from regions such as Singapore and Japan. The Dallas-Fort Worth metroplex presents particularly robust opportunities in the multifamily, industrial, retail, and office categories. It is an advantageous location that attracts a growing and highly qualified workforce and proximity to infrastructure and supply chain elements such as multimodal transportation.

At the same time, Texas’ business-friendly environment gives corporations room to maneuver without severe regulatory oversight. With banks increasingly willing to take on major real estate financing deals, reduce payments, and extend maturity dates, real estate investment prospects are growing ever brighter.