How Community Banks Are Winning CRE Deals as Large Banks Retreat

Community banks and credit unions are capturing an unprecedented share of commercial real estate lending as the nation's largest banks systematically retreat from the sector. Since the Global Financial Crisis, large banks have slashed CRE exposure from 10% to just 6% of their loan portfolios, while community banks now originate roughly 80% of all CRE lending and maintain CRE concentrations averaging 31% of total loans. This structural shift accelerated dramatically in 2024-2025, creating what ANB Bank President Koger Propst describes as "a time of opportunity" with "good customers wandering the streets that their current financial institutions haven't been able to serve."

The retreat isn't temporary positioning—it reflects permanent regulatory constraints, risk appetite changes, and strategic reorientation at money-center banks. For commercial real estate borrowers, the implications are clear: relationship-focused community lenders now control the market, offering faster approvals, flexible structures, and terms that developers say "far exceed" what national banks provide.

Large banks have abandoned CRE lending at historic pace

The numbers tell a stark story of institutional retreat. Banks with over $100 billion in assets now hold just 6% of their loan portfolios in CRE, compared to 31% at community banks and 17% at mid-size institutions, according to Federal Reserve data analyzed by Wolf Street. Money-center and larger regional banks combined hold only about 25% of the CRE loan market, with the remaining 75% held by smaller institutions.

This retreat accelerated through 2024. Trepp's data consortium tracking 25 banks with $300 billion in CRE shows origination volumes had fallen 58% below pre-COVID averages by mid-2024. Bank originations dropped from $10 billion in Q1 2020 to less than $4 billion in Q1 2024. As Trepp Chief Product Officer Lonnie Hendry noted, "The tightening cycle that the Fed undertook had a significantly worse impact on originations than COVID did."

Major banks have taken concrete steps to exit CRE:

• Wells Fargo announced plans to sell most of its commercial real estate loan servicing to nonbank firm Trimont, with total CRE book shrinking 1.1% year-over-year

• JPMorgan Chase advised investors to avoid CRE debt in early 2025, increasing loan loss provisions while net charge-offs rose to $2.2 billion in Q2 2024

• Valley National Bancorp sold $925 million in CRE loans to Brookfield in December 2024

• The six largest U.S. banks saw delinquent commercial property loans nearly triple to $9.3 billion in 2023

Community banks are filling the void with superior performance

While large banks retreat, community banks are actively expanding CRE portfolios with remarkable credit quality. The performance differential is striking: community bank CRE charge-off rates stand at just 1.5 basis points, compared to 21.6 basis points at GSIBs—a 14-fold difference. Midsize banks report 1.8 basis points and regional banks 11.6 basis points, making community banks the clear leaders in credit performance.

The Federal Reserve Bank of Dallas reports that in Texas alone, community bank loan growth reached +7.1% year-over-year while regional bank lending actually contracted by 2.5%. Community bank deposits grew 5.5% versus regional bank deposits declining 0.4%. Nationally, 30% of community banks (approximately 1,374 institutions) now exceed the 300% CRE concentration threshold, with CRE loans comprising roughly 46.3% of total portfolios at community banks versus just 13% at large institutions.

Several factors explain community banks' superior asset quality:

• Smaller loan sizes constrained by lower capital bases correlate with better credit outcomes

• Full recourse lending with personal guarantees and cross-collateralization provides additional protection

• Owner-occupied properties comprise nearly 50% of micro community bank CRE versus speculative investor properties

• Medical office and professional buildings dominate portfolios rather than troubled urban office towers

• Local market knowledge enables better underwriting of borrower character and property fundamentals

Developers cite better terms and faster decisions from community lenders

The competitive advantages community banks offer are not abstract—developers and borrowers describe concrete benefits that drive their lending decisions. Michael Procopio, CEO of Procopio Companies, finances all 10 active multifamily projects (ranging from 150-400 units each) through local community banks in New England.

"They're generally giving us far better terms than we would get from the regionals, and certainly the big national banks," Procopio explains. "And the community banks are much more solution-oriented. On a construction loan, they can float, swap or cap the rate. They're just so flexible, and for us, what that gives us is confidence to close."

Speed represents another decisive advantage. According to the 2024 FDIC Small Business Lending Survey, 75% of banks can approve typical loans within 10 business days, with many community banks completing commercial loans in 3-5 weeks depending on regulatory requirements. By contrast, megabanks must convene loan-approval committees "located in another state, far from customers," as ICBA research notes.

The 2024 Federal Reserve Small Business Credit Survey confirms borrowers have noticed: applicants at small banks were more likely to be fully approved (54%) than at other lender types, while applicant firms were less likely to apply at large banks in 2024 (39%) than in 2023 (44%). Community banks' net satisfaction score of 77% tops large banks by 15 percentage points and online lenders by 48 percentage points.

Bank OZK and regional players dominate construction lending

Perhaps no institution better exemplifies community bank CRE success than Bank OZK, the Little Rock-based bank with approximately $37 billion in assets. In 2023, Bank OZK originated more than $3 billion in construction loans—exceeding both JPMorgan Chase and Wells Fargo. The bank has delivered nine consecutive quarters of record net income and 55 consecutive months of dividend increases.

"We're getting a much larger share of the pie right now, but it's just a smaller pie," explains Chairman and CEO George Gleason. Recent transactions include a $328 million construction loan to Related Group and GTIS Partners for the 75-story Baccarat Residences in South Florida, and a $172 million loan for a condo tower in SoLé Mia community. South Florida has surpassed New York as Bank OZK's largest market, with $4.4 billion in outstanding loans across Miami, Fort Lauderdale, and West Palm Beach.

Other community banks actively capturing market share include:

Customers Bank (West Reading, PA, $22.4 billion assets) has positioned itself to fill the vacuum left by Signature Bank and First Republic failures. "Across New York and the broader tri-state area, there weren't many outlets for property owners to refinance their maturities," notes Karl Seus, SVP and Head of CRE. "We're filling a void that's left by the other banks in the CRE industry as a whole."

United Community Bank (Greenville, SC, $28 billion assets) reports being "incredibly busy" compared to the prior year, with clients who had paused projects now moving forward. The bank structures typical construction loans with 48-month interest-only periods, 60-65% loan-to-cost ratios, and partners with other community banks on projects exceeding its $35 million single-asset limit.

Credit unions are expanding commercial real estate presence

Credit unions represent another growing force in CRE lending, though from a smaller base. According to NCUA data, credit unions hold $159 billion in CRE and reported 10.8% annualized growth in business and commercial loans through 2024. The total credit union system now encompasses $2.33 trillion in assets and 142.3 million members.

Regulatory constraints limit credit union commercial expansion—the Member Business Loan cap restricts business lending to 12.25% of assets. Currently, credit unions hold less than 5% of depository institution commercial loans, with banks controlling over 95% of the market. However, low-income designated credit unions report 12.2% of total loans as business loans versus 8.7% for standard credit unions, suggesting regulatory flexibility enables greater commercial participation.

Since 2010, community banks have issued $305 billion in SBA 7(a) and 504 loans—nearly 25 times more than credit unions' totals. Community banks provided 69.3% of SBA loans during this period, with the median community bank SBA loan at $289,500 compared to $150,000 at credit unions. In highest-poverty counties, community banks account for 76.5% of SBA lending.

Multifamily lending shows dramatic market share shifts

The multifamily sector illustrates broader market share dynamics. Total multifamily originations reached $288.7 billion in 2024, up 17% from $246.2 billion in 2023, according to MBA data. GSEs (Fannie Mae and Freddie Mac) maintained dominance at 41% market share by dollar volume, while depositories increased originations by 20% year-over-year.

However, regional and community banks saw their multifamily market share decline from 13% to 9% in H1 2024 as debt funds and CMBS lenders expanded aggressively. Alternative lenders (debt funds and mortgage REITs) captured 34% of non-agency loan closings in Q2 2025, with CMBS conduits surging from 3% to 19% market share.

The CBRE Lending Momentum Index reached 275 in Q2 2025, up 45% year-over-year and well above the pre-pandemic average of 229. Banks' share of non-agency closings has proven volatile—ranging from 18% to 43% quarter-to-quarter—as institutions navigate regulatory uncertainty and credit concerns.

Freddie Mac funded a record $66 billion in multifamily loans in 2024, surpassing $1 trillion in cumulative multifamily funding. The 2025 GSE caps increased to $73 billion each ($146 billion total), up 4% from 2024, with industry observers expecting the agencies to hit their caps after missing in 2023 and 2024.

Regulatory pressures continue constraining large bank CRE appetite

The 300% CRE concentration threshold established by 2006 interagency guidance remains the key regulatory constraint. Banks face enhanced supervisory scrutiny when total CRE loans exceed 300% of risk-based capital AND the CRE portfolio has increased 50% or more in the prior 36 months. A separate threshold applies to construction and land development loans at 100% of risk-based capital.

According to Florida Atlantic University analysis, 1,788 banks now have total CRE exposures exceeding 300% of total equity capital—up from 1,697 in Q3. Some 504 banks exceed 500% concentration. Among the largest banks, Flagstar Bank (formerly NYCB) reports 477-541% CRE exposure, the highest among institutions with over $100 billion in assets.

Basel III endgame proposals added uncertainty, though implementation has stalled. The original July 2023 proposal would have increased average binding capital requirements for large banks by 16%, with GSIBs facing requirements to hold up to 19% more capital. A September 2024 revision reduced the maximum increase to 9%, and the January 2025 regulatory freeze has further delayed implementation. The EU and UK have delayed their own Basel III implementation, citing U.S. inaction.

The FDIC's December 2023 advisory on "Managing Commercial Real Estate Concentrations in a Challenging Economic Environment" reinforced supervisory focus on CRE risk. Meanwhile, CRE loan delinquencies reached a five-year high per November 2024 Federal Reserve findings, with the Q4 2024 FDIC Quarterly Banking Profile reporting a 1.57% delinquency rate—the highest in a decade.

The path forward favors relationship-based lenders

The structural shift toward community bank CRE dominance appears durable. Large banks reduced CRE exposure deliberately after 2008-2009, and regulatory frameworks discourage reversal. As Newmark Executive Managing Director David Bitner observes, "Large national banks decreased their CRE exposure from 10 percent to 6 percent following the GFC, so regional banks stepped up to fill the gap."

Community banks possess inherent advantages that technology cannot replicate. The FDIC's 2024 survey confirms small banks use more "soft" or difficult-to-quantify underwriting information gathered through relationships, while large banks focus on "hard" quantitative credit bureau data. United Community Bank's Lisa Shelnutt summarizes the competitive dynamic: "Truthfully, what we have is a commodity. The money is all the same. It's really about the relationships."

With $957 billion in CRE mortgage maturities due in 2026 and total originations projected to reach $583 billion, opportunity remains substantial for lenders willing to serve the market. Community banks with strong deposit bases, disciplined underwriting, and local market expertise are positioned to continue capturing share from retreating national institutions.

Conclusion

The commercial real estate lending landscape has fundamentally restructured in favor of community banks and credit unions. Large banks' systematic retreat—driven by regulatory constraints, credit concerns, and strategic reorientation—has created lasting opportunity for relationship-focused lenders. Community banks now originate approximately 80% of CRE loans while maintaining charge-off rates 14 times lower than the largest institutions.

For borrowers, this shift means better terms, faster decisions, and more flexible structures from lenders who understand local markets. For community banks, CRE represents what NexTier Bank Chief Credit Officer Michael Smelko calls the "bread and butter that drives revenue and loan growth." The data suggests this competitive positioning will strengthen as maturities accelerate and large banks continue their pullback. Community lenders willing to serve good customers that national banks "haven't been able to serve" will find, as ANB Bank's Propst notes, that market dislocations create opportunities for those prepared to act.