For nearly two years, many banks effectively stepped away from commercial real estate lending.
As lenders grappled with loan portfolios weighed down by troubled office, retail, and multifamily assets, institutions of all sizes largely halted new originations. That dynamic is now beginning to reverse.
Banks—traditionally the backbone of commercial real estate finance—are reentering the market as balance sheets improve and refinancing conditions become more manageable.
“For a while, they were pretty staid and concerned and maybe a little overly conservative,” said Lisa Pendergast, president of the Commercial Real Estate Finance Council.
She attributed the shift to a stronger refinancing environment and banks’ growing willingness to work with borrowers on loan terms.
Commercial real estate loan originations by banks reached $455 billion in the first quarter of 2026, an 80% increase from the same period a year earlier, according to the Mortgage Bankers Association. The rebound follows steady growth throughout 2025 after six consecutive quarters of year-over-year declines in lending activity.
During that period, banks focused on repairing their portfolios—working with borrowers to repay loans, recognizing losses on impaired debt, and in some cases foreclosing on distressed properties. Their reluctance to lend created challenges for borrowers facing loan maturities and investors seeking financing for acquisitions, driving many toward private credit lenders that stepped in to fill part of the financing gap.
“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,” said Lee Smith, chief financial officer of Flagstar Bank, speaking at the Barclays 18th Annual Americas Select Conference in May. “But in Q4 of ’25, we started originating new CRE loans again.”
Flagstar, formerly known as New York Community Bank, rebranded in 2024 after facing severe financial stress tied to its exposure to New York rent-stabilized multifamily properties. Smith said the bank remains cautious about New York City multifamily lending but is actively pursuing opportunities in the Midwest, South Florida, and California.
The broader market backdrop has also improved. Office markets in New York and San Francisco have shown significant recovery from pandemic-era lows, while investment sales activity has accelerated, creating additional lending opportunities. Manhattan recorded nearly 42 million square feet of office leasing in 2025, while San Francisco posted approximately 12 million square feet—both cities’ strongest leasing years since 2019, according to Avison Young.
Banks have also become modestly more flexible in their underwriting standards. According to the Federal Reserve’s April Senior Loan Officer Opinion Survey, lenders reported either easing commercial real estate lending standards or leaving them largely unchanged over the past year.
Areas of flexibility include larger maximum loan amounts, tighter lending spreads, and extended interest-only payment periods. Some institutions also reported reducing debt service coverage requirements for construction and multifamily projects.
Competition appears to be a key driver. Banks cited increasing pressure from both traditional lenders and non-bank financing providers as a reason for loosening terms.
Reaching The Inflection Point
Many lenders now describe the industry as approaching an inflection point—one where legacy portfolio issues are largely resolved and new lending can resume.
PNC Bank expects loan growth to accelerate as its commercial real estate portfolio stabilizes.
“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,” said Michael Thomas, head of corporate and institutional banking at PNC, speaking at the RBC Capital Markets Global Financial Institutions Conference in March. “I think we’ll see more broad-based real estate opportunities going into the remainder of the year.”
Thomas noted that PNC’s pipeline of prospective deals has increased by 300% and said the bank is exploring opportunities in sectors that have seen limited investment since the pandemic, including retail, industrial, and office properties.
Dime Community Bank is also preparing to expand its lending activity. The bank, which maintains a $2.8 billion commercial real estate portfolio, expects to return more aggressively to the market later this year.
Management anticipates reducing its CRE concentration to approximately 350% of risk-based capital, a key regulatory measure of bank health. Once that threshold is reached, executives expect to increase commercial real estate lending at a moderate pace alongside growth in other business lines.
The approach remains selective. In multifamily lending, for example, Dime is prioritizing relationship-based borrowers—clients who maintain significant deposits with the bank—rather than broadly financing new transactions. The bank expects its CRE portfolio to grow by roughly 5% to 6% this year.
“We’re back in the market right now for investor CRE,” said Chief Operating Officer Avinash Reddy during the company’s April earnings call.
The Interest Rate Challenge
Despite improving lending conditions, significant challenges remain.
Many office markets outside New York and San Francisco continue to struggle with elevated vacancies and weak demand. At the same time, numerous Sun Belt and Mountain West cities are still working through an oversupply of newly delivered multifamily units.
The biggest uncertainty, however, remains interest rates. Treasury yields—which serve as the benchmark for commercial real estate borrowing costs—have climbed more than 50 basis points since late February. As a result, many borrowers who secured mortgages at rates between 4% and 5% several years ago now face refinancing at rates ranging from 7% to 9%.
“Many banks entered 2026 in a holding pattern amid geopolitical uncertainty and volatile interest rate expectations, said Judith Ricks, vice president of commercial real estate research at the Mortgage Bankers Association. “If rates remain elevated, refinancing challenges could become a major obstacle to market recovery. On bank lending specifically, I am definitely concerned about the ability to refinance.”
Source: The Real Deal
