Yield potential for real estate credit remains highly compelling. While real estate lending spreads have come down from their highs during COVID-19 in 2020 and following the onset of the Fed’s rate-hiking cycle in 2023 (see “Real estate lending spreads,” page 43), they continue to hover near 10-year averages, offering compelling value relative to corporate bonds.
For example, spreads on fixed-rate less than 60 percent loan-to-value (LTV) loans average 170 basis points, compared with 80 basis points for investment-grade corporate bonds, a 90-basis-point premium (see “Asset class credit spreads,” page 43). To be sure, private real estate credit typically carries an illiquidity premium relative to listed bonds, but the gap is historically wide today.
Moderate-leverage, floating-rate loans currently offer spreads of approximately 250 basis points. With modest leverage, these spreads potentially can rise to 400 basis points to 500 basis points, or higher, with len
