Commercial Real Estate Credit:
An Expanding Market Segment

Impact of Rising Rates on Bond and CRE Credit Markets

In March 2022, the Federal Reserve (the Fed) issued its first 0.25% Fed funds rate increase since 20181 to help slow surging inflation rates. As of June 2022, the Fed announced its third increase of 0.75%.2 It is anticipated that there will be several more rate increases through year-end. This has negatively affected bonds with the Bloomberg Aggregate Bond Index returning -11.7% year-to-date June 15, 2022.

When interest rates increase above a bond’s coupon rate, the purchased bond price begins to decrease. For example, if in 2020 an investor purchased a bond paying 3% interest and in 2021 interest rates increased to 4%, the price of the original bond will decrease because the coupon is less attractive than that of a new bond issued today at current market rates.

Floating-rate loans, on the other hand, don’t have a specific coupon rate or fixed interest payment like traditional bonds. Floating-rate loans are known by many names, including bank loans, senior loans and leveraged loans. These loans reset every 30 to 90 days, typically fluctuating with interest rate levels. This means that as interest rates rise, so will the rate on the floating-rate loan. Amid today’s bond market environment, floating-rate loans are a unique and attractive characteristic of some CRE credit strategies.

What is CRE Credit?

Commercial real estate (CRE) credit is a loan or security backed by an interest in an income-producing property. Loan types that are typically acquired or originated for CRE credit strategies include first mortgage loans, mezzanine loans, and mortgage-backed securities, among others.

Commercial Mortgage REITs and The Capital Stack

A common CRE credit strategy is the commercial mortgage real estate investment trust (REIT). Commercial mortgage REITs, otherwise known as CRE credit REITs, focus on providing real estate financing and often serve as the lender on the investment, potentially generating portfolio income based on the spread between the interest income collected on mortgage assets and funding costs.

The capital stack refers to the layers
of capital required for purchasing and
operating a CRE asset. It identifies in
what order investors receive income
and profits generated by the
investment property.

INL 11980 Revised Capital Stack Graphic-01 (1)

The capital stack refers to the multiple sources of capital used to acquire and operate a CRE asset. It is typically comprised of four categories: common equity, mezzanine debt, preferred equity, and senior debt. The goal of many CRE credit REITs is to originate and purchase mortgages which are in a senior position within the capital stack. Therefore, if property values decrease, the equity portion may lose value, but the borrower frequently continues to make loan payments to protect their equity position.

However, it should be noted that CRE credit REITs are also subject to default risk, meaning that if the borrower stops making loan payments the value of the loan will be negatively affected. While CRE credit is senior to equity in the capital structure, it does not prevent CRE credit REITs from suffering losses.

INL 9475 CRE Pillar Page White Paper CTA v2_ (2)

Amid today’s bond market environment,
floating-rate loans are a unique and attractive
characteristic of some CRE credit strategies.

Growing Market Opportunity

According to Trepp, there is approximately $5 trillion3 of commercial mortgage debt, or CRE credit, outstanding in the United States. Compared to other well-known debt capital markets such as high-yield bonds and leveraged loans, CRE credit is outpacing these markets in terms of size by nearly $1 trillion.

2021 Major Debt Capital Market Size

(in trillions of dollars)



Sources: Trepp. CRE Loan Growth - Outstanding Debt Reaches $5 Trillion in Q3 2021. December 2021; S&P Global. LCD Quarterly Review. Q4 2021; The Economist. America’s high-yield debt is on ever-shakier foundations. June 2021.



The CRE credit asset class has evolved and grown in the aftermath of major financial crises. As many traditional lenders retreated in the wake of challenging economic events, non-bank alternative lenders, including mortgage-backed securities and private debt funds, stepped in to fill the void.


Commercial Mortgage Originations

(As of 12/31/2021)






Source: Mortgage Bankers Association. Commercial/Multifamily Mortgage Debt Outstanding. Q4 2021 Report

Educational Video Series: CRE Credit Market

Don MacKinnon, Portfolio Manager at Sound Point Capital Management, LP provides insight on the CRE credit market and what has changed amid the ongoing COVID-19 global pandemic.




3: Trepp. CRE Loan Growth - Outstanding Debt Reaches $5 Trillion in Q3 2021. December 2021

Inland Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of Inland Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment.

Inland Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. Inland Investments cannot guarantee that the information herein is accurate, complete, or timely. Inland Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.
All investing is subject to risk, including the possible loss of the money you invest. In particular, Commercial real estate (CRE) credit and securities investments are subject to the risks typically associated with CRE which include, but are not limited to: market risks such as local property supply and demand conditions; tenants’ inability to pay rent; tenant turnover; economic matters such as inflation and interest rate fluctuations; increases in operating costs; changes in laws and regulations; relative illiquidity of real estate investments; changing market demographics; acts of nature such as hurricanes, earthquakes, tornadoes or floods; and availability of financing. Some of the risks specifically related to investing in a credit fund include, but are not limited to: distributions cannot be guaranteed and may be paid from sources other than cash flow from operations, including borrowings and net offering proceeds; and conflicts of interest with, and payment of fees to, affiliates.