Miss this, miss the cycle every time: CRE follows the capital.
---- 9 building blocks ----
Strip away the noise and there are 9 building blocks of the CRE balance sheet. 5 debt. 4 equity. Each one has carved out a niche where it competes best.
When all 9 are stable and growing, transaction volumes rise, spreads tighten, and values compound. When one shakes, the others rarely fill the gap.
...because each block has a job the others can't really do.
And there's been a lot of shaking over the last few years.
---- The five debt blocks ----
1. Banks:
Loaded up on low-yielding loans and Treasuries when rates were near zero. When rates spiked, those positions cratered. Banks run on roughly 10% equity, which got eaten quickly. Result: largely sidelined.
2. Insurance companies:
Used to dominate high-quality, low-spread, long-duration mortgages. Apollo, KKR, and other PE giants have spent a decade buying insurers to bring that capital in-house. Traditional life co's are losing share to captives.
3. Agencies:
Fannie and Freddie keep getting pulled between policy mandates. Scope has narrowed, portfolios have stress, and the rules keep changing.
4. CMBS:
Used to be the workhorse for mid-market borrowers via conduit pools. Now dominated by SASB deals on trophy assets. Mid-market borrowers have had to go elsewhere.
5. Debt funds:
Less regulation, more flexibility, deeper stacks. This is where private credit met real estate, and a wall of capital answered.
---- The four equity blocks ----
6. Core:
Coupon-clipping equity in perpetual private vehicles that struggle when the actual value of assets falls below carrying values. Investors want out, redemption queues build, and managers focus more on redemptions than acquisitions; the cheapest cost of capital sits on the sidelines.
7. Core plus:
Core with a slight risk bump. Few managers have nailed it (e.g., Invesco, Carlyle). Even Blackstone's vehicle has underwhelmed. Similar dynamic as core re: queues.
8. Value-add:
Returns depend on positive leverage as much as on value creation. When debt got expensive, the math broke. New reality: value-add may be proving to be riskier than opportunistic.
9. Opportunistic:
Same problem, magnified. Most of the celebrated "dry powder" has stayed parked because levered returns don't pencil. Now investors want that powder back.
---- The balance ----
Banks pulled back. Insurance dynamics flipped. CMBS narrowed. Core equity is bottled up by carrying-value gaps. Value-add and opportunistic are stuck on broken leverage math. Debt funds are doing real work, but no single block can carry the others.
Following the CRE dollars is an essential skill, which is why we start every FastTrack cohort with a deep dive into these 9 building blocks.
PS -- Our next FastTrack cohort kicks off in one week. DM if this resonates and you want to level up.
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