A significant capital allocation mismatch is generating new opportunities in commercial real estate debt markets, according to Jimmy Zumot of Siguler Guff & Company. His analysis highlights a disconnect between where institutional capital is directed and where actual deal volume exists, a gap that experienced lenders are leveraging for higher returns.
The numbers illustrate the issue clearly. “85% of the $71 billion that has been raised by debt funds over the last four years has been raised in billion dollar plus formats,” Zumot explained. “But nearly 85% of the US transaction volume sits well below that target transaction size.” This has resulted in what he describes as an “institutional debt offering at sub-institutional scale,” a market segment that larger funds cannot access efficiently.
This has created two distinct markets. In the $140 million deal space that attracts institutional capital, Zumot sees pricing at SOFR plus 220 basis points for deals that are only 60% leased, essentially wagering on future stabilization. Meanwhile, in the $34 million range where his firm operates, they achieve SOFR plus 480 basis points on 97% leased, stabilized assets. “You’re looking at about 260 basis points of excess return for taking commensurate risk by simply trading in these smaller markets.”
The capital allocation issue also extends to geographic focus. While institutional capital often targets major gateway cities, Zumot’s strategy emphasizes “under-celebrated markets”—secondary and tertiary cities that are benefiting from demographic shifts. “If you reallocate 10 basis points of New York demand to Charlotte, that’s a really meaningful bump for Charlotte, while it’s not much of a mood for New York.”
This demographic movement is significant. “There has been a big retooling of population to more affordable areas,” Zumot noted. These markets can have lower barriers to entry and may be more vulnerable to oversupply, but they offer opportunities for growth that larger funds typically overlook due to deal size limitations.
In the $10 to $30 million financing space where Siguler Guff operates, competition is limited. “We’ve not run into reliable and consistent competition,” Zumot said. The landscape shifts quickly once deal sizes exceed $25 million, where “the horizon of opportunity of competition really expands pretty quickly.”
This lack of competition persists despite broader market dislocation. Banks originated about $200 billion less in commercial real estate loans in the most recent year compared to 2021. Non-bank lenders are still “weighed down with NPLs, and capital markets are dislocated.” Yet, the institutional response continues to focus on larger deals in competitive markets rather than pursuing the middle market.
Zumot’s approach reflects a broader perspective on market efficiency and specialization. “In an age of increasing competition and democratized information, you’ve actually needed to be specialized. You need an edge in an increasingly efficient market. You can’t simply boil the ocean anymore.”
The capital allocation mismatch suggests that efficiency improvements in large-deal markets have created blind spots in other segments. For firms willing to “roll up their sleeves and do the hard work of finding institutional sponsors in sub-institutional markets,” the rewards include higher yields, better credit quality, and less competition.
This situation challenges traditional assumptions about where the best risk-adjusted returns are found in commercial real estate debt. While many institutions focus on billion-dollar strategies, the real opportunity may be in the overlooked middle market, where deal flow is healthy but capital is limited.
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