Subordinate debt and the new era of real estate investing

Author: Fidelity Investments

Strong fundamentals, constrained bank lending, and reset property values have created opportunities for private credit investors

Originally published by our U.S. partners in January 2026.

Highlights

  • Commercial real estate (CRE) fundamentals appear positive in early 2026, supported by healthy property-level income, high occupancy, and limited new supply.
  • Banks are lending on CRE at reduced proceeds (lower leverage), creating openings for private credit providers to supply capital at favorable yields and terms.
  • Lending on reset property values at modest leverage enhances lender protections and the potential for higher risk-adjusted returns.
  • Subordinate lending may be particularly compelling, as it offers structural advantages compared with other approaches, including flexible partnerships with senior lenders and the avoidance of financial leverage risk.
  • Strong industry fundamentals, constrained capital, and historically modest leverage all appear to remain in place for CRE debt in early 2026.
Exhibit 1: Fundamentals point to higher property income, constrained property supply Left graph showing size of US private credit market ($T) with the average at approximately 2.5% from 2005 to end of 2025. There was a dip in size to almost -10% in 2021, before peaking in late 2022 and the downward trend since then has been to the average. Right hand graph shows a bar chart of commercial real estate completions with square feet in millions from 2010 to end of September 2025. It was an upward trend, peaking in 2023 at almost 400 square feet (millions) in 2023 before dropping to 200 square feet (millions) in 2024. And to 150 square feet (millions) in 2025.

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Authors
Fidelity Investments
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