Community Lending Gains Ground as CRE Giants Retreat

Small but Steady: Community Banks Expand CRE Role

With big banks pulling back from CRE due to regulatory scrutiny, market volatility, and economic uncertainty, community banks and credit unions are stepping in. According to GlobeSt, they’re emerging as a stabilizing force in the lending landscape. According to a new white paper from Colliers, these smaller institutions are not only staying active—they’re adapting quickly to the new environment.

The report, which features insights from Colliers’ Aaron Jodka and Darling Consulting Group’s Frank Farone and Jeff Reynolds, highlights how community lenders are refining their strategies amid rising refinancing risk and changing borrower behavior.

Strategic Tweaks to Lending Approach

Instead of focusing on traditional long-term benchmarks like the 10-year Treasury, smaller lenders are eyeing the five-year point on the yield curve—aligned with the typical three- to five-year loan term. With more volatility on this part of the curve, many banks are allowing borrowers to choose between floating rates and fixed options through hedging tools like up-front fees and swaps.

Tighter underwriting has become the new norm. Banks are seeing a surge in loan modification requests—especially for loans originated in 2023 and 2024—prompting lenders to demand wider spreads and stronger financial buffers.

Margins Up, Pressure Down

Improved yields on loans have reduced the need to cut aggressive deals. One community bank cited in the report expects a 19% margin increase over the next year, thanks largely to higher rates and better pricing power.

Still, there’s complexity in managing existing loan books. A “barbell dynamic” is emerging: older loans issued during the pandemic at 4–5% rates are performing differently than newer loans at 7–9%, creating wide variation in prepayment rates and loan behavior.

Market Share Shifts in CRE Lending

While community lenders now hold a bigger share of CRE debt than a decade ago, most upcoming maturities remain concentrated at larger institutions. As those banks reduce exposure, community lenders are stepping in—often quietly, but critically.

These lenders’ more flexible and hands-on approach to community lending may prove key in keeping the CRE sector afloat through its ongoing reset.

Why It Matters

This transition in lending leadership comes as the commercial real estate industry faces tighter capital conditions and refinancing challenges. Community banks’ growing influence could reshape how deals get done—especially in secondary markets and smaller asset classes where they typically operate.

What’s Next

Expect community lending institutions like local banks to continue expanding their presence in the CRE space, albeit cautiously. With regulatory uncertainty and market volatility still in play, lenders will likely keep refining risk strategies as they fill the void left by larger institutions.