Commercial Real Estate Debt: When Being At The Bottom Means Being At The Top

Posted by Dave Kasprzak on Aug 30, 2021 11:14:50 AM

7 Minute Read

Commercial real estate (CRE) debt is emerging as a particularly attractive alternative. And for good reasons. Not only do these largely fixed-rate investment vehicles typically produce current cash flow right out of the box from the interest income paid on the loan, CRE debt historically exhibits consistently low correlations to other asset classes, including equities. In fact, CRE debt is negatively correlated to the S&P 500 over the last 20 years.

But the most interesting, and perhaps the least appreciated or understood benefit of CRE debt, is its risk profile. Beyond the asset class’s potential to produce attractive risk-adjusted returns, CRE debt is the first to be repaid in the event of a borrower’s default. Taken together, this combination of benefits may deliver attractive income with a relatively lower risk of principle in a single investment.

How does that work in real estate? It’s all about the “capital stack”.

In this blog, we’ll discuss the capital stack as it pertains to real estate risk and potential rate of return…and how CRE debt sits at the top of that heap, based on historical data.


Layers of Capital

We’ve written before of the enormous size of the commercial real estate market -- 32.6 trillion in U.S. dollars by some rough estimates. That impossibly large number comes from grouping a multitude of real estate sectors, including Industrial, Multifamily Housing, Retail (i.e., grocery, restaurants, consumer goods, etc.), Hotel and Lodging, Medical, and Office. While each space has its own economic nuances, the total of the parts typically moves the CRE market in relative unison.

At ground level, there are two specific sources of capital that go into purchasing and operating a commercial real estate project:

 1. Equity, which represents an ownership interest directly in the asset, and

 2. Debt, a loan given to the equity ownership and typically collateralized by the asset itself or other assets of the equity owner

Naturally, both basic capital categories have subdivisions of their own, with different types of equity – common and preferred – and debt – mezzanine and senior -- available for allocation by investors. But there’s a term for describing the overall relationship between all the different types of capital invested into a real estate asset. It’s called the capital stack.

∗Commercial real estate debt is represented by the Giliberto-Levy Commercial Mortgage Performance Index.

A Definite Order of Priority

The capital stack represents the underlying financial structure of a commercial real estate deal. The stack outlines who will receive income and profits generated by the property, the order it will be distributed, and who has the first right to foreclose on the asset as collateral.



  1. Past performance does not guarantee future results.

  2. Equity owners are at the top of the capital stack but hold the lowest priority, meaning they’re last to be paid back. Full payout only occurs when the asset is sold or an individual investor sells his or her ownership interest.

    Senior debt, then -- at the bottom of the capital stack -- holds the highest priority. CRE debtholders are the first to be paid. Debt also typically comes with a fixed term, meaning the entire principal plus interest amount must be paid back at a date certain (or, if before maturity, often with pre-payment penalties) or the equity ownership risks losing control of the asset.

    Because of this seniority, CRE debtholders exhibit less risk from principal loss when property values fall. In the event a property is sold for less than it was originally purchased/financed, debt holders are repaid first, followed in order by the remaining cap stack. While it’s true The Great Financial Crisis (GFC) in 2008 produced multiple scenarios in which debtholders were not entirely repaid their capital -- despite being at the front of the line -- this was an extreme environment with unprecedented volatility and punishing financial losses. Even CRE debt was not entirely immune from the outsized conditions of GFC- which is why it is important to note that despite the priority in payment, investors should still understand the risks of commercial real estate debt instruments which can affect a borrower’s ability to repay a loan – and ultimately may adversely impact an investment.

    A positive twist to 2008, at least in our space, is traditional lenders reexamined leverage levels and retrenched in specific segments like construction financing. As a result, demand for traditional CRE financing will likely continue to exceed traditional commercial bank supply and provide additional opportunity for non-traditional and private lenders via mezzanine debt and preferred equity.

    How Can Investors Participate in the Stack?


    CRE debt may generally generate risk-adjusted returns that compare favorably with expected equity returns while maintaining the characteristics and benefits of senior fixed income. It’s no surprise that the market is quite attractive to large insurance companies, pension plans, and investment banks. These highly sophisticated institutional investors typically allocate 10% or more of their portfolios to commercial real estate.

    Regrettably the opportunity to invest in the CRE debt space has been limited for many non-institutional investors. By most accounts, individual investors allocate less than 1% of their assets to this attractive asset type. Speaking with our own real estate investors, most, maybe all, of whom have experience in various layers of the capital stack, has confirmed the difficulties in accessing CRE debt.

    To that end, and with an eye toward closing the allocation gap, Forum is combining its expertise as a commercial real estate owner/operator with the skills of a large, global fixed-income manager to provide easier access to the CRE debt market for individual investors. There’s no reason that high-net-worth individuals, family offices, and financial intermediaries should miss such na investment opportunity that has the potential to offer attractive risk-adjusted returns.


Interested in learning how you can invest in CRE debt with the Forum CRE Income Fund ("FCREIF")?

Learn More




Forum Investment Group—with affiliate entities Forum Real Estate Group and Forum Capital Advisors—is a private real estate investment firm with expertise and an emphasis on multifamily investing throughout real estate cycles and across the full capital stack. Affiliate entity Forum Capital Advisors, LLC (“FCA”) is a registered investment adviser and manager of the firm’s fund investment vehicles. For more information, visit


Important Investment Considerations

Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call 303.501.8804 or visit Read the prospectus or summary prospectus carefully before investing.

Diversification does not ensure a profit or protect against a loss.

Investing in the Fund involves risks, including the risk that an investor may receive little or no return on his, her or its investment or that an investor may lose part or all of such investment. Therefore, investors should consider carefully the following principal risks before investing in the Fund. There is no assurance that the Fund will achieve its performance or investment objectives or achieve any targeted rate of return or return of capital or any target distribution yield. Shareholders may lose some or all of their invested capital, and prospective investors should not purchase the Fund' shares unless they can readily bear the consequence of such loss. Limited liquidity is provided to shareholders only through the Fund's quarterly repurchase offers. There is no guarantee that shareholders will be able to sell all of the shares they desire in a quarterly repurchase offer. The Fund's investments are also subject to liquidity risk. Funds with principal investment strategies that involve securities of companies with smaller market capitalizations, derivatives or securities with substantial market and credit risk tend to have the greatest exposure to liquidity risk.

As a non-diversified investment company, the Fund may invest more than 5% of its total assets in the securities of one or more issuers. The Fund may therefore be more susceptible than a diversified fund to being adversely affected by events impacting a single borrower, geographic location, security or investment type. The Fund's investments in real estate debt are expected to be secured by real estate assets. The Fund's concentration in the real estate sector may increase the volatility of the Fund's returns and may also expose the Fund to the risk of economic downturns in this sector to a greater extent than if its portfolio also included investments in other sectors. Further, there is no limit regarding the amount of Fund assets that may be invested in any single geographic area within the United States. To the extent the Fund concentrates its investments in a limited number of assets or geographic areas, the Fund will be subject to certain risks relating to concentrated investments. Commercial real estate debt instruments (e.g., mortgages, mezzanine loans and preferred equity) that are secured by commercial property are subject to risks of delinquency and foreclosure and risks of loss that are greater than similar risks associated with loans made on the security of single-family residential properties. The Fund expects to invest a portion of its assets in pools or tranches of commercial mortgage-backed securities (CMBS)*. In a rising interest rate environment, the value of CMBS may be adversely affected when payments on underlying mortgages do not occur as anticipated, resulting in the extension of the security's effective maturity and the related increase in interest rate sensitivity of a longer-term instrument. Subordinate CMBS are also subject to greater credit risk than those CMBS that are more highly rated. Mortgage loans on commercial properties generally lack standardized terms, which may complicate their structure and increase due diligence costs. Commercial mortgage loans also tend to have shorter maturities than single-family residential mortgage loans and are generally not fully amortizing, which means that they may have a significant principal balance or “balloon” payment due on maturity.

Placement Agent: Foreside Fund Services, LLC

*A security backed by commercial and multifamily mortgages rather than residential real estate.



The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Forum Real Estate Group (“Forum”), Forum Capital Advisors, LLC (an affiliate of Forum Real Estate Group, an Exempt Reporting Adviser and manager of private funds), its other affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that Forum offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results. There can be no assurance that any investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. This should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation.  Diversification does not eliminate the risk of experiencing investment loss.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.


Topics: Real Estate Debt, Multifamily Real Estate

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