(Bloomberg) -- The decline in commercial real estate values has eased enough that private investors are starting to fill in a financing void left by the pullback of regional banks and other traditional lenders to the industry, according to buyout giant KKR & Co. 

Issuance of commercial mortgage-backed securities will pick up by nearly a third this year compared to last, and private equity funds that have spent the last 18 months in wait-and-see mode are “awash in dry powder,” KKR’s head of real estate credit Matt Salem wrote in a note to clients. KKR’s own real estate credit pipeline has now swelled to $15 billion, up from an average $10-12 billion in 2023, he said.

“We are bringing multiple deals to our equity investment committee each week,” Salem wrote. 

Fear of widening losses in the commercial real estate market has been a top concern with investors, according to Bank of America Corp.’s latest Global Fund Manager survey. In that heightened risk, though, a growing number of investors are looking to deploy capital. Property giant Brookfield, for example, is seeking to raise $15 billion for a new real estate fund to capitalize on an expected wave of value deals.

Despite the influx of private capital, it probably won’t be enough to completely fill the gap left behind by regional banks, Salem said. 

Banks hold around 50% of outstanding commercial real estate debt, but they now face heightened regulatory scrutiny and have pulled back, according to the note. And there simply isn’t enough private capital available to step up. If bank lending recedes to 40% of the roughly $5.8 trillion commercial real estate debt market, then that would leave a “gap” of over $500 billion in need of financing, Salem said.

“Who will be able to fill that gap? We do not think insurance companies or U.S. government agencies can allocate significantly more to commercial real estate given their existing exposure,” he said. “That leaves CMBS and debt funds.” 

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