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Community Banks Step Up As Larger Lenders Retreat From CRE

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As economic headwinds, rate volatility, and regulatory changes continue to buffet the real estate market, community banks and credit unions are quietly adjusting their commercial real estate (CRE) lending strategies in ways that reflect both caution and resilience.

A recent white paper from Colliers offers insight into how smaller financial institutions are navigating today’s complex lending environment. Experts from Colliers and Darling Consulting Group discussed the evolving landscape, highlighting the growing importance of flexible loan structures, risk management, and borrower collaboration.

Renewals and Repricing Show Stability

One positive sign: many banks are managing to renew or reprice CRE loans with minimal friction. Even when challenges arise, borrowers are actively engaging with lenders to renegotiate or seek forbearance—a dynamic experts view as a healthy indicator of ongoing borrower-lender relationships and relative market stability.

Focus on the Five-Year Yield Curve

Unlike larger institutions that often track 10-year Treasury yields or broader benchmarks like SOFR, community banks are keeping a closer eye on the five-year point of the yield curve. That’s because most CRE loans operate on three- to five-year cycles. This part of the curve has been more volatile, prompting lenders to offer more nuanced rate structures—including floating and fixed-rate options—with mechanisms like rate locks, upfront fees, or back-to-back swaps.

Underwriting Tightens, Margins Improve

Loan modification requests are on the rise—especially for deals originated in 2023 and 2024—as banks adopt tighter underwriting standards. In contrast to the ultra-low rates seen during the 2020–2022 period, current market conditions involve wider spreads and more conservative pricing models. Many lenders are also padding their balance sheets to prepare for future uncertainty.

Interestingly, improved margins are helping to ease pressure. Some institutions are seeing projected margin gains of nearly 20% thanks to higher interest income, making them less reliant on aggressive deal-making to stay profitable.

The “Barbell” Effect: Old vs. New Loans

Today’s lending environment is marked by a stark contrast between pandemic-era loans issued at 4%–5% interest rates and newer loans priced closer to 7%–9%. This “barbell dynamic,” as described by Darling Consulting’s Jeff Reynolds, is affecting prepayment patterns. Newer loans, especially those with recent modifications, have prepayment rates nearing 30%, while older loans are seeing rates closer to just 5%. This divergence underscores the importance of modeling prepayment behavior more accurately.

Community Banks Step Up

Perhaps the biggest shift is in the market’s structure. Community banks and credit unions now hold a much larger portion of CRE loans than they did a decade ago. And as larger banks reduce their exposure to the sector, smaller institutions are increasingly filling the gap—just as a wave of loan maturities looms.

In short, community lenders are becoming indispensable players in the CRE ecosystem. Through more cautious underwriting, flexible structures, and borrower engagement, they’re not just weathering the storm—they’re helping stabilize the market at a critical moment.

 

Source:  GlobeSt.

 

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Driven By High Rates, U.S. Commercial Lending Imploded 47%

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In 2023, total commercial real estate mortgage borrowing and lending was estimated at $429 billion, marking a 47 percent decline from $816 billion in 2022, and a 52 percent fall from the record high of $891 billion in 2021. These figures are highlighted in the Mortgage Bankers Association’s 2023 Commercial Real Estate/Multifamily Finance Annual Origination Volume Summation.

The MBA survey, which does not include data from smaller and mid-sized depositories, recorded $306 billion in loans closed by dedicated commercial mortgage bankers in 2023, a 49 percent decrease from $595 billion in 2022.

Jamie Woodwell, MBA’s Head of Commercial Real Estate Research, commented, “Higher interest rates, uncertainty about property values, and concerns over the fundamentals of some properties contributed to a sharp decline in CRE borrowing and lending last year. The reduction was widespread across all major property types and capital sources. The continued increase in the total CRE mortgage debt indicates that the drop in originations mainly reflected a lower borrower demand, influenced by fewer sales transactions and refinances. Where possible, property owners opted to hold steady.”

Woodwell also noted, “2024 seems to be starting slowly as well. High interest rates will likely remain a hindrance for many property owners, but with over $900 billion in loan maturities expected, and possibly a growing acceptance of these rates, we might see more activity in the market this year.”

Regarding specific property types, multifamily properties experienced the highest lending volume in the previous year, with an estimated total of $264 billion, and $178 billion of that directly tracked by dedicated mortgage bankers. First liens made up 96 percent of the dollar volume closed by mortgage bankers.

Mortgage banking firms reported closing $306 billion of CRE loans in their names and acting as intermediaries on another $225 billion. These firms also served as investment sales brokers for transactions worth $225 billion.

Depositories emerged as the top capital source for CRE mortgage debt, followed by life insurance companies, pension funds, government-sponsored enterprises (Ginnie Mae, Fannie Mae, and Freddie Mac), private label CMBS, and investor-driven lenders.

 

Source:  The World Property Journal

 

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