Debt vs. Equity in Commercial Real Estate Financing: Both Sides Now

An ongoing commercial real estate capital and value reset has paved the way for compelling investment opportunities in late 2027. Whether debt or equity is the better play involves multiple variables.

While many CRE investors have flocked to the debt side in recent years due to more safety with better downside protection, equity can serve as the better bet depending on the location, property sector or opportunity.

“It’s so nuanced, but sometimes it’s the right time to play in debt, and sometimes it’s the right time to play in equity,” said Sondra Wenger, head of capital markets at owner and operator KBS. “We are picking markets, and it allows us to stay committed to that market because if it’s no longer an equity deal because it’s gotten too expensive or whatever the reason might be, then we can look at it as a debt deal. So this allows you to capture where the opportunity is.” 

The individual property sectors will sometimes determine what strategy to seek, with KBS more likely to pursue a debt deal in the hospitality sector over equity based on market conditions, according to Wenger. 

Wenger noted that location plays a starring role in determining credit or equity investments, with growth markets that have strong synergies across property sectors prioritized. She said the North Hills area of Raleigh, N.C., is one example of a market KBS has targeted for both credit and equity investments. 

“We want to make sure that it’s an improving market and it’s not already established,” Wenger said. “We have been focused on places that we really see cross-asset synergy and are able to invest in any level of the capital stack.”

Dan Berman, partner at law firm HSF Kramer, said that while debt has been more the capital investment of choice in the CRE market in recent years, the space has grown more competitive. That makes finding deals more challenging. Berman noted that some clients who have raised money for debt funds are taking a more “conservative” approach of late, waiting for the right deals due to the increased lender competition for individual transactions.

Berman noted the market headwinds that have hit CRE valuations over the course of this decade, starting with the COVID-19 pandemic in 2020 and followed by rising interest rates. These underscored the importance of investors being able to play in both the debt and equity markets.  

“What came out of what we’ve learned over the past number of years is that if you can put your money in different places in the capital stack, and you have that flexibility, then you’re in business,” Berman said. “If you’re stuck in a narrow band of what you can invest in, you could end up sitting on the sidelines for a while when there are opportunities elsewhere in the capital stack.”

Lately, equity investors are taking a more selective approach to deals, according to Berman, given the heavier risks. That means often seeking particular asset classes and sponsors with solid track records and with whom they have deep relationships. He said that selectivity came into play when some clients in recent years avoided equity plays in data centers because of “frothy” market conditions. 

Dan Michaels, managing partner of Stockdale Capital Partners, said focusing on both debt and equity is essential for the distressed opportunities that his Los Angeles-based investment firm seeks. He said with multiple challenges at play buying properties, including uncertainties with valuations, debt offers some more “attractive” options due to equity values falling in many circumstances below debt loan levels. 

Michaels said his firm will look into credit investments for higher-risk sectors such as office or life sciences while pursuing equity opportunities in generally lower-risk sectors like multifamily or retail, depending on the market. He said preferred equity and mezzanine debt are also often explored as hybrid options in a market of many unknowns.

“There’s such volatility, and we are now six years into what I call the lost decade in real estate with the great reset, so you have to be able to think across the entire capital stack,” Michaels said. “The ability to dip and dive, and be able to look at the relative value of a hospitality credit opportunity in San Francisco versus a retail play in Texas versus a multifamily play in Nashville, and look at each of them and create a diversified portfolio is important.” 

Joshua Crane, co-founder of construction lender S3 Capital, said there is room in investor CRE portfolios for multiple strategies, but the Federal Reserve’s hawkish stance on inflation has complicated this on the equity side. That’s because interest rates will often be above the going-in cap rates. Crane, who largely lends on multifamily assets, said equity investors now need to buy properties with a strategy to increase value — such as renovations or upgrades — since in this market environment they can’t rely on falling cap rates.

While equity can provide high returns at the right time of the cycle, Crane stressed that debt loans, and construction debt in particular, offer more consistency during a period of high interest rates. 

“I think on the credit side of the ledger, especially when you’re doing construction debt, you’re getting paid the right return for the risk you’re taking,” Crane said. “I think it’s the best kind of risk-reward tradeoff.”

Crane said S3 Capital’s construction loan pipeline has remained strong this year after a big 2025 in which the private lender executed $2.6 billion in originations. S3 typically structures its deals at around 65 percent loan-to-value at the senior end of the capital stack, with preferred or common equity also contributing.

Stockdale Capital’s Michaels stressed that distressed credit opportunities will likely increase in the near term, including property foreclosures and loan defaults. That could lead to an active 2027 on the opportunistic investing side.

“We’re seeing a severe fallout because of the rate environment,” Michaels said. “We see it as an extremely fruitful time to have capital and take advantage of the dislocation and drive upside returns for our investors.” 

Andrew Coen can be reached at acoen@commercialobserver.com.