Institutional investment dollars are flowing into privately managed debt funds at historic levels, seeking both yield and stability at a time when many believe we are in the later stages of a very long upward trend in the commercial real estate cycle.

Numerous factors are piquing interest in the commercial real estate debt sector: the enormous $4.1 trillion commercial and multifamily mortgage marketplace; the history of lower loss and higher recovery rates than comparable corporate bonds; the opportunity for portfolio diversification (e.g., property type, geography) coupled with short duration instruments that facilitate risk rebalancing; and the presence of subordinated capital as a margin of safety to late-cycle value disruption and volatility. In addition, research shows a high level of negative covariance between commercial real estate debt and most other financial assets, thereby allowing a portfolio manager to construct a more “efficient frontier” if real estate mor