Banks are dipping their toes into commercial real estate lending again, after largely sitting on the sidelines for the past several years due to high interest rates, bank failures and regulatory pressure. However, the alternative lenders who stepped in to fill in the gap, aren’t going anywhere.
“Now, as the market has recovered from some uncertainty and banks feel their footing to be firmer and they feel more comfortable, they are starting to come back into a more stable and growing market,” says Doug Faron, the founder and managing partner of West Palm Beach, Fla.-based real estate investment firm Westlight Capital.
While there has been a resurgence in bank lending to the commercial real estate sector over the last 12 months, banks are being very cautious and there is a lot more friction and scrutiny to get from start to finish then there was five or six years ago, says Michael Lee, a partner at middle-market capital broker HKS Real Estate Advisors.
Bank lending is not expected to revert back to pre-pandemic levels, as alternative lenders have moved in. “Banks will continue to be critical providers of commercial real estate credit, but private capital is now structurally embedded,” says Charlie Rose, global head of credit at Invesco Real Estate. “Going forward, we are likely to see a more balanced mix of bank and alternative lender capital. The market really needs both banks and alternative lenders to be active.”
Alternative lenders are playing an important role in the middle market, as a significant portion of capital raised recently for commercial real estate credit has been from larger managers. “The middle-market segment in commercial real estate is an attractive opportunity for private lenders since there is a gap in the market,” says Aaron Peck, the managing director, co-head and co-portfolio manager of alternative credit solutions at Monroe.
“There has been significant pullback among the regional banks, which has reduced capital available for middle market commercial real estate lending, since the Covid pandemic.”
According to Peck, regional banks hold about 70 percent of commercial real estate debt with banks only providing 20 to 30 percent of new capital.
Rose adds that alternative lenders have been the biggest beneficiaries of this, with their market share nearly doubling from pre-pandemic levels to 17 percent in 2025.
Peck explains that there are a variety of reasons why banks pulled back from commercial real estate lending including higher interest rates and a decline in property values.
“When interest rates shot up to 7 to 7.5 percent, banks couldn’t make loans pencil anymore at the same leverage point, which scared them and created internal friction. They got nervous about the market and took a step back,” Lee says, adding that we also saw banks, such as First Republic Bank, being shut down, which contributed to the panic. Many banks also merged, including Bank Leumi Le-Israel Corp. merging with Valley National Bancorp., which also cut down on the number of lenders available.
Rose adds that the issue for many banks has been related to regulatory pressure, unrealized valuation volatility, and concentration limits, especially after rates moved 500 basis points in under two years. While delinquency rates remain manageable overall, office losses and refinancing risk have driven a far more conservative posture across bank credit committees.
And while banks are reentering the market, the commercial real estate sector is still cobbling together capital, Lee says, noting that they are looking to multiple buckets of capital, including local banks, credit unions, private lenders, the CMBS market and bridge lenders. “The regional banks that remain, after massive bank consolidation, have to put their money to work,” Peck says. “They can’t sit on cash, as they need to generate net interest margin to drive earnings, so they must find pockets to lend. Real estate is an area that banks understand and find attractive.”
