As the real estate market continues to grapple with economic uncertainty, rate volatility and shifting regulatory winds, community banks and credit unions are recalibrating their lending strategies—often in subtle but significant ways.
A recent white paper from Colliers spotlights a candid discussion among industry experts, including Aaron Jodka, U.S. capital markets director of research at Colliers; Executive Director Justin Bakst; and Managing Directors Frank Farone and Jeff Reynolds of Darling Consulting Group. Their conversation sheds light on how smaller financial institutions are navigating a challenging commercial real estate landscape amid rising refinancing risks and changing borrower behavior.
One encouraging trend among these lenders is their ability to renew or reprice many loans without much of a problem. “There’s little issue with making the numbers work,” said one panelist. And even when problems do arise, borrowers frequently return to renegotiate or ask for forbearance—something the experts framed as a “good sign,” suggesting both engagement and a level of stability.
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While much of the CRE sector focuses on the 10-year Treasury note or benchmarks like the federal funds rate or SOFR (Secured Overnight Financing Rate), smaller banks are paying closer attention to the five-year point on the yield curve. According to the white paper, this focus is tied to the common three- to five-year loan cycle—borrow, pay interest only, and then refinance. This segment of the curve has exhibited more volatility than the 10-year, prompting banks to take a more cautious stance. To hedge risk, many are pegging rates to a spread over an index, allowing borrowers to choose between floating rates and locking in fixed terms through mechanisms like up-front fees, 30-day rate windows, or back-to-back swaps.
Tighter underwriting has also become the norm. Banks are seeing a notable uptick in loan modification requests, especially for financing originated in 2023 and 2024. This is a sharp contrast from the low-rate environment of 2020 to 2022, when many refinancings were based on a relatively stable five-year Treasury yield hovering around 40 basis points. Now, with wider spreads and a more conservative pricing approach, banks are building financial cushions to guard against market turbulence and geopolitical volatility.
Improved margins have further reduced pressure to cut deals. One bank client, heavily exposed to the CRE market, is projecting a 19% increase in margin over the next year, largely driven by higher yields on loans, according to the experts quoted in the Colliers report.
But the lending environment is not without new complexities. One particularly thorny issue is what Reynolds described as a “barbell dynamic.” Loans issued during the height of the pandemic—roughly in the 4% to 5% range—behave very differently from today’s, which span from 7% to 9% rates. This disparity is influencing loan performance and prepayment behavior. According to Reynolds, newer debt from 2023 and 2024 has prepayment rates near 30%, especially with modifications included. In contrast, loans from 2020 to 2022 are seeing only about 5% prepayment. “It’s a reminder that institutions may underestimate prepayment impact,” he noted.
Perhaps most telling is a structural shift in the composition of CRE lending. Community banks and credit unions now hold a significantly larger share of CRE loans than they did a decade ago. Yet most of the looming maturities are still concentrated among larger banks. As those institutions scale back their CRE exposure, smaller banks are “stepping in,” effectively taking up the baton. With debt maturities accelerating, community lenders are playing an increasingly central role in supporting the sector—just as the market needs them most.
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