![Too Much Debt, Not Enough Equity: Q&A with Lunada Rose Partners’ Adam Nourafchan “...with interest rates still elevated debt investors are often achieving higher returns than equity investors despite taking on significantly less risk” The housing market in 2025 presents a perplexing situation: despite robust fundamentals like low vacancy rates, steady rent growth, and persistent demand driven by a structural shortage of homes, development is stalling. The issue isn’t a lack of financing but a profound misalignment of capital—too much debt, not enough equity, according to Adam Nourafchan, founder and managing partner of Lunada Rose Partners. The misalignment traces back to the Federal Reserve’s aggressive interest rate hikes in 2022, which pushed the federal funds rate from near-zero to over 5% by mid-2023. This caused capitalization rates to rise from historic lows of 3% to 4% to 5% to 6% or higher in many markets. Equity investors, facing compressed returns due to higher cap rates and elevated debt costs, found their risk-adjusted returns squeezed below acceptable thresholds. This shift turned debt funds, once a niche corner of real estate, into a mainstream vehicle. Blackstone’s recent $8 billion real estate debt fund closing in early April 2025 exemplifies this trend, joining other giants like Apollo and KKR, who’ve raised $20 billion collectively for debt strategies since 2023. The resulting imbalance—abundant debt, scarce equity—has frozen many housing projects. Developers can secure loans but struggle to raise the equity needed to break ground. Nourafchan examined the durability of this capital imbalance and potential catalysts for change, drawing comparisons to historical patterns. He also offered insights on key factors investors should monitor in the coming months as capital markets adapt to this shifting dynamic. CM: You’ve noted a growing capital misalignment in real estate, with debt being plentiful but equity scarce. What’s causing this imbalance in the first place? AN: Following the Fed’s emergency rate cuts during the COVID-19 pandemic, [U.S.] Treasuries and LIBOR dropped to historic lows. This ushered in an era of cheap money, which in turn fueled a boom in debt capital fundraising to support a surge in real estate transaction volume. Even as the Fed began raising rates in 2022, debt fund managers continued to raise capital aggressively, offering [Limited Partners] LPs a wide range of financing products aimed to capitalize on distressed and overleveraged assets — including mezzanine loans, preferred equity and other forms of rescue capital. As a result, we experienced nearly three consecutive years of record-setting debt capital fundraising, even as asset valuations declined, and transaction volumes hit cyclical lows. Borrowers facing loan maturities on their aggressive COVID-era loans turned to these very expensive debt solutions out of necessity to keep their equity afloat. Today, with interest rates still elevated, debt investors are often achieving higher returns than equity investors despite taking on significantly less risk. In the recent climate of market volatility and uncertain property fundamentals, debt has simply offered more attractive risk-adjusted — and often absolute — returns, so it makes sense there would be more available debt capital than equity. CM: How does this misalignment ripple through to housing supply and long-term development pipelines? AN: Capitalizing new developments has become incredibly challenging. Borrowing costs have risen by more than 500 basis points on many projects while inflation has simultaneously increased labor and material costs. At the same time, investors are demanding higher equity return thresholds, given lower-risk debt strategies are yielding comparable or better returns. Add to that the uncertainty around property-level fundamentals and sales, and new development becomes a riskier proposition than ever before. These compounding pressures have severely constrained the housing pipeline at a time when the U.S. is already facing a significant housing shortage, with demand far outpacing supply. CM: How sustainable is this imbalance, and what might shift it going forward? AN: Unsustainable. There will eventually be a rebalancing in the capital markets — either through a broad acceptance of the new normal in asset valuations or through a meaningful drop in interest rates. So far, the anticipated wave of distress tied to the “wall of maturities” on COVID-era loans has been postponed, thanks to inflation-driven rent growth and generous loan modifications. But if lenders stop accommodating these extensions, we’ll likely see a pickup in transaction activity and a reset of both asset prices and capital stacks. That would open the door for a new cycle of equity investing, with more favorable entry points. Similarly, if interest rates decline, the return profile for equity investors will improve—potentially ending the current era of negative leverage, particularly in Sun Belt markets where we’ve most seen cap rates trail borrowing costs. CM: How does this capital misalignment compare to past trends you’ve seen? AN: This is part of the natural ebb and flow of real estate capital markets. During the peak of the COVID era, equity capital was abundant. Rent growth hit unprecedented levels, and cap rates compressed by nearly 200 basis points. In 2021, we saw rent growth across some of our Florida and Georgia properties exceed 50%, with mid-2% cap rates becoming common. It was incredibly easy to raise equity in that environment. But that dynamic reversed sharply after the Fed’s 2022 rate hikes, leading investors to pivot toward debt strategies that offered stronger returns with lower perceived risk. CM: What opportunities does this create for investors in the current environment? AN: For equity investors, there’s a compelling opportunity to capitalize on stalled development activity by targeting high-growth markets with limited new supply. Take Dallas, for example: it continues to show strong trends in population, job growth, and rent performance. Yet construction starts this quarter are at their lowest level in a decade, and the current pipeline represents just 3.7% of inventory. For debt investors, the $1.5 trillion wall of maturities coming due in the next 15 months represents a significant opportunity. Many owners are grappling with diminished asset values and can't refinance at favorable terms. That opens the door for mezzanine loans, preferred equity, and other forms of rescue recapitalizations that offer attractive yields with structured downside protection. CM: What should we watch for in the months ahead as capital markets adjust to this dynamic? AN: Cap rate movement will be key. We’ve now endured 1–3 years of negative leverage in the multifamily and industrial sectors, particularly in the Sun Belt, which has made equity investing difficult, requiring investors to bet on future rent growth to justify today’s prices. The looming wave of maturities could force a reset in asset values and debt structures, potentially restoring balance to the market. At the same time, macroeconomic forces — like tariff policies — could create ripple effects in the capital markets. We’re already seeing a decline in Treasury yields, but it remains to be seen whether this will be enough to improve equity returns or if cap rates will compress alongside borrowing costs, sustaining the current imbalance. CM: Any final thoughts for investors navigating this market? AN: Now more than ever, investors need to be laser-focused on risk-adjusted returns. Understanding where your lender is pricing risk can be incredibly valuable — because if debt is delivering similar returns to equity, it's worth questioning whether you're in the right part of the capital stack.](https://www.connectmoney.com/wp-content/uploads/sites/4/2025/04/Real-Asset-Adam-Nourafchan-Managing-Partner-at-Lunada-Rose-Partners.jpg)
Too Much Debt, Not Enough Equity: Q&A with Lunada Rose Partners’ Adam Nourafchan
The housing market in 2025 presents a perplexing situation: despite robust fundamentals like low vacancy rates, steady rent growth, and persistent demand driven by a structural shortage of homes, development is stalling. The issue isn’t a lack of financing but a profound misalignment of capital—too much debt, not enough equity, according to Adam Nourafchan, founder and managing partner of Lunada Rose Partners.
The misalignment traces back to the Federal Reserve’s aggressive interest rate hikes in 2022, which pushed the federal funds rate from near-zero to over 5% by mid-2023. This caused capitalization rates to rise from historic lows of 3% to 4% to 5% to 6% or higher in many markets. Equity investors, facing compressed returns due to higher cap rates and elevated debt costs, found their risk-adjusted returns squeezed below acceptable thresholds.
This shift turned debt funds, once a niche corner of real estate, into a mainstream vehicle. Blackstone’s recent $8 billion real estate debt fund closing in early April 2025 exemplifies this trend, joining other giants like Apollo and KKR, who’ve raised $20 billion collectively for debt strategies since 2023.
The resulting imbalance—abundant debt, scarce equity—has frozen many housing projects. Developers can secure loans but struggle to raise the equity needed to break ground.
Nourafchan examined the durability of this capital imbalance and potential catalysts for change, drawing comparisons to historical patterns. He also offered insights on key factors investors should monitor in the coming months as capital markets adapt to this shifting dynamic.
CM: You’ve noted a growing capital misalignment in real estate, with debt being plentiful but equity scarce. What’s causing this imbalance in the first place?
AN: Following the Fed’s emergency rate cuts during the COVID-19 pandemic, [U.S.] Treasuries and LIBOR dropped to historic lows. This ushered in an era of cheap money, which in turn fueled a boom in debt capital fundraising to support a surge in real estate transaction volume. Even as the Fed began raising rates in 2022, debt fund managers continued to raise capital aggressively, offering [Limited Partners] LPs a wide range of financing products aimed to capitalize on distressed and overleveraged assets — including mezzanine loans, preferred equity and other forms of rescue capital.
As a result, we experienced nearly three consecutive years of record-setting debt capital fundraising, even as asset valuations declined, and transaction volumes hit cyclical lows. Borrowers facing loan maturities on their aggressive COVID-era loans turned to these very expensive debt solutions out of necessity to keep their equity afloat.
Today, with interest rates still elevated, debt investors are often achieving higher returns than equity investors despite taking on significantly less risk. In the recent climate of market volatility and uncertain property fundamentals, debt has simply offered more attractive risk-adjusted — and often absolute — returns, so it makes sense there would be more available debt capital than equity.
CM: How does this misalignment ripple through to housing supply and long-term development pipelines?
AN: Capitalizing new developments has become incredibly challenging. Borrowing costs have risen by more than 500 basis points on many projects while inflation has simultaneously increased labor and material costs. At the same time, investors are demanding higher equity return thresholds, given lower-risk debt strategies are yielding comparable or better returns.
Add to that the uncertainty around property-level fundamentals and sales, and new development becomes a riskier proposition than ever before. These compounding pressures have severely constrained the housing pipeline at a time when the U.S. is already facing a significant housing shortage, with demand far outpacing supply.
CM: How sustainable is this imbalance, and what might shift it going forward?
AN: Unsustainable. There will eventually be a rebalancing in the capital markets — either through a broad acceptance of the new normal in asset valuations or through a meaningful drop in interest rates.
So far, the anticipated wave of distress tied to the “wall of maturities” on COVID-era loans has been postponed, thanks to inflation-driven rent growth and generous loan modifications. But if lenders stop accommodating these extensions, we’ll likely see a pickup in transaction activity and a reset of both asset prices and capital stacks. That would open the door for a new cycle of equity investing, with more favorable entry points.
Similarly, if interest rates decline, the return profile for equity investors will improve—potentially ending the current era of negative leverage, particularly in Sun Belt markets where we’ve most seen cap rates trail borrowing costs.
CM: How does this capital misalignment compare to past trends you’ve seen?
AN: This is part of the natural ebb and flow of real estate capital markets. During the peak of the COVID era, equity capital was abundant. Rent growth hit unprecedented levels, and cap rates compressed by nearly 200 basis points. In 2021, we saw rent growth across some of our Florida and Georgia properties exceed 50%, with mid-2% cap rates becoming common.
It was incredibly easy to raise equity in that environment. But that dynamic reversed sharply after the Fed’s 2022 rate hikes, leading investors to pivot toward debt strategies that offered stronger returns with lower perceived risk.
CM: What opportunities does this create for investors in the current environment?
AN: For equity investors, there’s a compelling opportunity to capitalize on stalled development activity by targeting high-growth markets with limited new supply. Take Dallas, for example: it continues to show strong trends in population, job growth, and rent performance. Yet construction starts this quarter are at their lowest level in a decade, and the current pipeline represents just 3.7% of inventory.
For debt investors, the $1.5 trillion wall of maturities coming due in the next 15 months represents a significant opportunity. Many owners are grappling with diminished asset values and can’t refinance at favorable terms. That opens the door for mezzanine loans, preferred equity, and other forms of rescue recapitalizations that offer attractive yields with structured downside protection.
CM: What should we watch for in the months ahead as capital markets adjust to this dynamic?
AN: Cap rate movement will be key. We’ve now endured 1–3 years of negative leverage in the multifamily and industrial sectors, particularly in the Sun Belt, which has made equity investing difficult, requiring investors to bet on future rent growth to justify today’s prices.
The looming wave of maturities could force a reset in asset values and debt structures, potentially restoring balance to the market. At the same time, macroeconomic forces — like tariff policies — could create ripple effects in the capital markets.
We’re already seeing a decline in Treasury yields, but it remains to be seen whether this will be enough to improve equity returns or if cap rates will compress alongside borrowing costs, sustaining the current imbalance.
CM: Any final thoughts for investors navigating this market?
AN: Now more than ever, investors need to be laser-focused on risk-adjusted returns. Understanding where your lender is pricing risk can be incredibly valuable — because if debt is delivering similar returns to equity, it’s worth questioning whether you’re in the right part of the capital stack.
