The ongoing repricing and capital adjustment across commercial real estate is opening up new investment opportunities for institutional market participants. Whether debt or equity represents the more suitable instrument depends on numerous variables. While in recent years many players favoured the lending side due to better downside protection, equity remains attractive depending on location, sector and profile.
Sondra Wenger, Head of Capital Markets at owner and operator KBS, emphasised that the right timing for debt or equity requires a highly nuanced view. The flexibility to target the same market via either loans or direct equity investments allows her firm to remain active locally when equity transactions become too expensive. In the hotel sector, for instance, KBS is currently pursuing debt engagements under present market conditions. As a geographic example of parallel debt and equity assessments, she cited the North Hills submarket in Raleigh, North Carolina, where location-based synergies across asset classes are being actively sought.
Growing competition in the debt segment demands discipline
Dan Berman, partner at law firm HSF Kramer, pointed out that although debt has emerged as the preferred investment type, competition among lenders is noticeably intensifying. Some debt funds are therefore acting more cautiously and waiting selectively for suitable transactions. The market dislocations since 2020 and the subsequent interest rate rises have shown how crucial agility across the entire capital stack is. Those who restrict themselves to a narrow investment segment risk missing out on lucrative opportunities.
On the equity side, investors are meanwhile acting with greater caution. According to Berman, they are focusing primarily on reliable partners with long-standing track records and avoiding overheated segments. For instance, some investors have recently steered clear of direct investments in data centres due to ambitious valuations.
Hybrid solutions and differentiated sector strategies
For Dan Michaels, Managing Partner at Stockdale Capital Partners in Los Angeles, the interplay between both forms of financing is central to distressed strategies. Since equity values in some locations have fallen below the level of existing loans, debt often offers the more dependable profile. His firm evaluates loans primarily in higher-risk segments such as office or life science properties, while equity tends to flow into residential or retail assets. In addition, mezzanine capital and preferred equity are regularly deployed as hybrid instruments.
Joshua Crane, co-founder of construction lender S3 Capital, explained that the Federal Reserve's restrictive stance is weighing on equity returns, as interest rates often sit above initial yields. Investors must therefore deliver operational value enhancements. In the lending sphere, particularly for construction loans, the risk profile offers stable returns instead. Following a transaction volume of $2.6 billion in 2025, S3 Capital continues to see a well-filled pipeline, with loans typically structured at around 65 per cent loan-to-value at the senior end of the capital stack.
