Private credit is the fuel powering California’s dynamic property market.

It is a market offering limitless potential with California’s Legislative Analyst’s Office (LAO) predicting the state may need more than 2.5 million homes by 2031 to meet the demand.

That includes more than one million affordable units.

Builders and entrepreneurs have turned to private credit because banks have structurally retreated from transitional and small-balance real estate lending because of regulatory tightening.

The shift is durable, not cyclical, creating a sustained opportunity for disciplined private lenders.

The regulatory reset that changed lending

The fallout from the 2008 Global Financial Crisis is still felt today.

The private credit shift is a direct result of regulations put in place to prevent a repeat.

Banks were put squarely in the gun.

Basel III was introduced in 2010 which included the following key changes:

• stricter capital reserve requirements

• higher risk-weighted asset rules climbing to 150% for high-risk real estate 

• increased scrutiny on construction and non-stabilized real estate loans

As a result, regional banks were forced to reduce their exposure to transitional lending because the loans were more expensive to hold.

By 2023, US regional banking stress further reduced risk appetite.

As the banks reduced their exposure, the demand for private credit grew with AUM surpassing $3.5 trillion by early 2025.

That’s more than 17 times its level in 2009 of around $200 billion.

By 2025, alternative or non-bank lenders made up 37-40% of the commercial real estate market.

The bank pullback in real estate lending

Bridge loans and fix-and-flip lending doesn’t fit traditional bank underwriting models.

That’s not going to change.

Regulation makes it uneconomic for banks to aggressively re-enter that space.

Banks prefer:

• stabilized assets

• long-term fixed loans

• institutional borrowers

• lower LTV

Banks avoid:

• transitional properties

• heavy renovation

• small-balance developers

• short-duration construction risk

But private lenders are not replacing banks entirely.

They are merely occupying segments of the market that banks can no longer structurally serve efficiently.

Why private credit is growing faster than public markets

Private credit is outpacing public markets due chiefly to regulatory capital pressure, share market volatility and project-specific risks that public lenders aren’t willing to absorb.

It has driven institutional capital such as pension funds, insurance companies and family offices towards private credit seeking yields higher than public bonds can offer.

Public bond yields compressed for more than a decade post-GFC.

Private credit offers 8-12% for senior construction debt and around 12-18% for mezzanine financing.

As much as 15-25% of institutional portfolios are now seeking alternative investments including private credit, private equity, hedge funds and real estate equity.

But there are many other factors why private credit is growing faster than public markets.

• Banks are facing higher capital costs

• Public markets don’t like transitional risk 

• Developers need speed and flexibility

• California’s higher development risk (long entitlement timelines, CEQA litigation risk)

• California’s environment of high loan sizes, thin margins and the need for layered capital stacks favor structured capital

The advantages of private credit in real estate

Not all private credit is the same.

There are many different types including:

Corporate direct lending – offers predictable cash flow but less collateral protection if unsecured and typically lower yields than distressed or mezzanine real estate lending.

Distressed debt – high potential yields but very high risk with the need for complex legal and operational management.

Asset-backed finance – lower credit risk due to collateral but lower upside compared with distressed or mezzanine loans.

Real-estate private credit offers the following advantages:

• a hard asset for collateral

• defined duration (usually 6-18 months)

• clear enforcement pathway, especially in California

• tangible collateral valuation

Senior secured real estate credit historically demonstrates strong recovery rates compared with unsecured corporate debt because of its position in the capital structure and the nature of its collateral.

Senior secured debt is at the top of the food chain and is paid first from the proceeds of collateral liquidation.

In contrast, unsecured corporate debt has no specific assets and is repaid only after secured creditors, tax claims and other senior obligations are met.

Is the private credit opportunity right for you?

Private real estate credit is a significant structural opportunity that exists after regulatory changes disincentivized and limited banks in the aftermath of the GFC.

It is not a temporary response to rate cycles but a durable shift in capital markets structure.

Much needed construction continues across California and will do so for years to come.

What has changed is the source of that capital.

Borrowers still need it, capital seeks yield and real estate remains collateralized and enforceable.

Central provides a savvy property investment opportunity.

The Central Mortgage Income Fund (CMIF) is a California-focused private credit fund that originates and acquires real estate-backed loans giving investors consistent, risk-adjusted returns from short-term, senior-secured loans.

Central works by aligning investors with targeted borrowers utilising carefully underwritten short-duration loans with first-position liens and conservative loan-to-value ratios (average 65%).

Get in touch to find out more.

This analysis is based on comprehensive market data and industry research. Past performance does not guarantee future results. Investors should conduct their own due diligence and consult with qualified advisors before making investment decisions.