Originally published on April 19, 2024, by Beth Mattson-Teig for UrbanLand Magazine.

Debt funds have been attracting a lot of attention—and capital—due to their ability to deliver equity-like returns. But can they deliver on what they’ve promised?

“It has been a very buzzy sector, for sure, but I think [that’s] for good reason,” says Andrew Janko, managing director, investments at RCLCO Fund Advisors. Real estate private credit fund managers and their investors are enjoying a fairly novel environment. They’re able to invest into a market where there are still solid underlying real estate fundamentals in numerous property types during a time when capital markets are more challenged. In addition, higher base rates have improved the overall profitability of the types of loans that they make, with less competition from commercial banks, he notes.

Base borrowing rates that have moved from near zero to 5 percent have increased the overall profitability of a loan for those lenders that have the capacity to lend. “The opportunity itself is broad-based,” said Kirloes Gerges, managing director of portfolio management at Principal Asset Management. The secured overnight financing rate (SOFR) will affect any floating-rate deals tied to it, no matter where the investment lies in the capital stack, whether it is a senior loan or mezzanine debt.