Behind the Stack: The Rise of Back Leverage in Commercial Real Estate Debt
Knight Frank Capital Advisory’s Jess Qureshi outlines key findings from her new report "Behind the Stack". In an extensive survey of over one hundred bank and non-bank lenders, the report explores the rapidly evolving landscape of back leverage within the commercial real estate (CRE) debt market.
3 minutes to read
Back leverage set to become the future standard
Our survey found that 90% of respondents believe that back leverage is either already, or will soon become, the market standard.
Over £100 billion of capital has been raised from funds capable of utilising back leverage, with more than 80% of debt fund respondents confirming that they plan to implement back leverage within the next 12 months.
Whilst four out of five debt fund respondents can take back leverage, only a quarter are currently using it for the majority of transactions; this therefore represents an opportunity for over two hundred debt funds to expand their back leverage strategies, demonstrating the huge growth potential in this space.
What does back leverage supply look like?
Back leverage in CRE is still a relatively new concept, yet leveraged solutions for private credit funds have continued to develop. It is now becoming increasingly relevant, and the banking sector is growing allocations to back leverage, with 90% of banks who are already active expecting to increase activity further within the next twelve months.
Currently, half of banking respondents said they are active in back leverage lending, and an additional 20% expecting to enter the market soon. Furthermore, four out of five banking respondents believe back leverage already is, or will soon become, a key component for all CRE bank lenders.
As the back leverage provision expands, so too will its influence on liquidity in the CRE debt market. We anticipate more banks will recognise this opportunity, leading to a significant increase in active lenders within this space.
Back leverage for development
Behind the Stack highlights an imbalance between the demand and supply for back leverage; all debt fund respondents that currently use back leverage use loan on loan, while only two fifths utilise repo structures.
The number of debt funds currently utilising repo structures (the structure that provides the majority of liquidity for development back leverage) is minimal in comparison to the potential demand available.
For example, while 65% of debt funds require back leverage for development loans, 55% cannot accept mark-to-market, thereby presenting an opportunity for innovative financing solutions.
An alternative solution would be for more banks to offer loan on loan or securitisation structures for funding CRE developments – this will be essential if banks are to capitalise on this growing market.
Back leverage in a turbulent environment
Although the past two years have been challenging for many, it has been a good test case to see how back leverage can work in difficult times. When asked to comment on what challenges they have experienced with their existing CRE facilities, both our debt fund and banking respondents cited the top challenges to be refinancing difficulties and issues with valuations and/or income. However, the study revealed promising collaboration dynamics, with four out of five debt funds saying they worked well with their back leverage providers to find suitable solutions.
The continued willingness and relationship focus from banks demonstrates that these facilities can work effectively, even when navigating unexpected market turbulence.
Behind the Stack – what else to expect?
The growth of private credit and the retrenchment of mainstream banks has fundamentally transformed back leverage from a niche strategy to a critical market component. Our research reveals not just a trend, but a structural shift in how CRE debt is conceived and executed.
Behind the Stack is the first report of its kind, offering a comprehensive overview of today's back leverage market by combining exclusive survey results with Knight Frank Capital Advisory's unique insights as the industry’s leading back leverage advisor.
The report details typical lender requirements and offerings, including advance rates, diversification requirements, ticket sizes, guarantees and more. It also explores considerations around repo structures, including mark-to-market, as well as our predictions for the future of the back leverage market.
To receive a copy of the full report, or find out more about Knight Frank Capital Advisory's back leverage offering, please contact Jess Qureshi