Banks Get Back Into Commercial Real Estate Lending

14 minutes read

For a stretch of about two years that seemed to many like an eternity, banks were essentially out of the commercial real estate lending business.

Institutions big and small went pencils down on new deals as they worked through loan books burdened with bad office, retail and multifamily loans.

But that’s starting to change. And now banks — normally the lifeblood of CRE finance — are back in business.

“For a while there they were pretty staid and concerned and maybe a little overly conservative,” said Lisa Pendergast, president of the Commercial Real Estate Finance Council, who attributed the rise to a better environment for borrowers to refinance their loans — and banks being more willing to meet them on terms.

Banks originated $455 billion worth of commercial real estate loans in the first quarter of 2026 — up 80 percent from a year earlier, according to the Mortgage Bankers Association. Originations grew throughout 2025, following a period of 18 months when the volume of new deals showed a year-over-year decline each quarter.

Banks spent that time cleaning up their books: working with borrowers to pay off their loans, taking their lumps on impaired debt and, in some cases, foreclosing on properties. The banks’ unwillingness to lend made it difficult for borrowers who had to refinance maturing loans and investors looking to finance new purchases. Many turned to private credit lenders, which have stepped in to fill part of the void banks left behind.

“From March ’24 through pretty much the end of ’25, we deliberately took ourselves out of originating new CRE loans because we were overweight that asset class,” Flagstar Bank CFO Lee Smith said at the Barclays 18th Annual Americas Select Conference in May. “But in Q4 of ’25, we’ve started originating new CRE loans.”

Flagstar used to be called New York Community Bank, which rebranded in 2024 after it nearly collapsed due to exposure to New York rent-stabilized properties.

Smith said the bank “obviously” is not looking to do New York City multifamily loans, but is targeting areas like the Midwest, South Florida and California.

But the macro environment has improved over time. Office markets like New York and San Francisco have recovered from the pandemic, and investment sales volumes are on the rise — creating more opportunities to lend. Manhattan’s total office leasing in 2025 was nearly 42 million square feet, and San Francisco’s was about 12 million, according to Avison Young. Those were the best figures for both cities since 2019.

And banks have become more accommodating — if just slightly — to borrowers. Banks said that over the past year they have either eased their terms or basically left them unchanged, according to the Federal Reserve’s Senior Loan Officer Opinion Survey from April, which every year asks about CRE underwriting standards.

Those terms include higher maximum loan sizes, narrower spreads and longer interest-only payment periods. A few banks said they’ve lowered debt service coverage ratios for construction and multifamily loans.

The reason for the easing was increased competition from other banks and non-bank lenders.

Inflection point

Many bankers are talking about the inflection point where they clear up their books and start lending again.

PNC Bank said it sees an inflection point this year where loan growth will grow.

“The good thing for us is from a real estate perspective, we think we’re at the tail end of the reduction in that book,” Michael Thomas, PNC’s head of corporate and institutional banking, said at the RBC Capital Markets Global Financial Institutions Conference in March. “So I think we’ll see more broad-based real estate opportunities going into the remainder of the year.”

Thomas said PNC’s pipeline of new deals is up 300 percent, and that the bank will look at opportunities in areas that have been underinvested since the pandemic such as retail, industrial and offices.

And Dime Community Bank, which has a CRE portfolio of about $2.8 billion, is looking at getting back into lending later this year.

That’s when the bank expects to lower its concentration of commercial real estate loans to 350 percent of its risk-based capital — a metric regulators use to assess a bank’s health. At that point Dime executives say they’ll hit an inflection point to start growing real estate lending moderately to keep up with other lending segments.

The bank is being selective. On the multifamily side, for instance, the bank is focusing on relationship lending (bank speak for providing loans to people and/or companies that keep large amounts of deposits with the bank) and not so much financing new transactions. It said it plans to grow the CRE business by 5 or 6 percent this year.

“We’re back in the market right now for investor CRE,” Dime Chief Operating Officer Avinash Reddy said on the company’s April earnings call.

All about rates

While last year saw the environment for banks improve, 2026 presents challenges.

Outside of New York and San Francisco, many office markets are still struggling. And many cities across the Sun Belt and Mountain West regions are still working to absorb new multifamily supply.

But the big unknown is interest rates. Treasury yields — which set the base rate for all kinds of debt including CRE loans — have risen more than 50 basis points since the Iran war began in late February.

Borrowers who took out mortgages years ago at 4 or 5 percent are now looking at refinancing into much more costly loans ranging from 7 to 9 percent.

Judith Ricks, a vice president of CRE research at the Mortgage Bankers Association, said that many banks she spoke to said they were in a holding pattern at the start of the year due to geopolitical concerns. She said if rates remain high, it will naturally have an impact in 2026.

“On bank lending specifically, I am definitely concerned about the ability to refinance,” she said.