Capital markets leaders see niche opportunities and persistent challenges as CRE markets gain strength
Real estate investors and lenders have faced a challenging market in recent years, shaped by elevated interest rates, slower deal activity, and a reset in asset values. Despite these headwinds, market conditions are strengthening and opportunities are emerging for investors with a solid strategy.
Capital markets leaders discussed these trends during the “New Capital, New Models” panel as part of the recent Bisnow Southern California CRE Finance, Capital Markets & Dealmaking Conference hosted in Los Angeles. Alex Stekler, a Vice President with KeyBanc Capital Markets Public Finance Group, joined the panel to share his insights related to affordable housing and governmental financing solutions.
Transaction volume is up, but liquidity remains a key concern
Panelists noted that the investment market has reached a turning point, with transactions accelerating in recent months. U.S. investment sales increased 33% year-over-year in the first quarter of 2026 and were up 21% compared to the Q1 average for 2017–2019, according to Newmark.1 Institutions and user investors were net buyers overall.
Lending activity is also gaining momentum. The Mortgage Bankers Association reported that U.S. commercial and multifamily mortgage loan originations rose 52% year-over-year in the first quarter of 2026, boosted by increased lending volumes for healthcare, retail, hotel, and industrial properties. Multifamily loan volumes rose 49% year-over-year.2
“In the affordable space, particularly in Southern California, debt is incredibly abundant for the right multifamily deals — especially ones that have certain income restrictions, and ones that qualify for municipal tax exemptions,” said Stekler. “Rates in California for typical multifamily deals are 30 basis points less than the rest of the country, based on the high demand for affordable multifamily paper.”
Panelists agreed that while debt capital is abundant, common equity is the most elusive piece of the capital stack. Despite the recent pickup in capital markets activity, investors remain highly selective and liquidity has become a major concern. Dry powder at closed-end funds totaled $363 billion in Q1, down 13% since December 2022, Newmark reported.1
Investors are strongly focused on distributions on paid-in capital (DPI), which measures the total capital that a private equity fund has returned to investors relative to contributions. Low median DPI in recent years has been a key factor preventing equity from re-entering the market. The resulting squeeze on liquidity has contributed to the substantial bargaining power enjoyed by limited partners (LPs).
“Equity definitely has the most power, which is why we try to 100% debt finance our deals by getting investment-grade ratings, and then financing them between mini-permanent and long-term permanent at rates at or around the Treasury [rate],” said Stekler. “That way we're able to 100% debt finance our deals without having to worry about long-term limited partner considerations.”
Taking aim at niche opportunities
Sponsors and developers seeking to tap into the available capital for real estate deals must have a well-honed strategy and story. Panelists expressed interest in niche opportunities in California such as industrial condominium projects and student housing refinancing. There is cautious optimism about well-located class A office buildings, despite widespread distress in the office sector.
One investment advisor emphasized precision in location, focusing on select cities or neighborhoods within major metro areas, such as the trendy Dogpatch neighborhood in San Francisco. The executive also prioritizes cross-asset reinforcement or investing in different property types that support each other within a given area (such as office and multifamily within an urban center, grocery-anchored retail and medical offices 2 miles out, and logistics facilities 20 miles out).
Capital markets leaders continue to see value in the Golden State despite challenges such as a high regulatory burden, which constrains real estate supply. “On the affordable side, California is one of the unique places where there’s a lot of political will to get things done,” said Stekler, noting that real estate is “wildly expensive” in the state and there is a significant need for affordable housing. “There are lots of opportunities in governments to get involved and help sponsors and developers create efficient solutions for deals.”
Multifamily opportunities vary dramatically from market to market. Challenging locations include those that are overbuilt, such as Austin and Denver, and those that maintain aggressive pandemic-era restrictions on evictions. Acute pain is being felt in some overbuilt Sun Belt markets, but owners are generally able to hold on and refinance.
Creativity and flexibility needed for the next 24 months
The CRE market is showing signs of recovery, but opportunities are less plentiful and more complicated than they used to be. Creativity in structuring deals, flexibility in the capital stack, and speed of action are increasingly essential. “People on the debt side need to get money to work quickly before rates go up even higher and lock their projects in,” said Stekler.
Over the next 24 months, investors in affordable multifamily should take a close look at cheaper tertiary markets that are poised to grow with the AI boom, according to Stekler. “Rates aren't going down anytime soon, especially for new construction and construction debt. People are moving and gravitating towards places with a lower cost of living and choosing markets and assets selectively.”
Connect with us
To explore the current market and what governmental financing solutions are available for your next affordable multifamily project, connect with Alex Stekler, Sam Adams, or your KeyBank Relationship Manager.