U.S. commercial real-estate finance is undergoing a structural re-wiring. Major banks—confronting tighter capital standards and lingering credit-risk anxiety—are shrinking their loan books even as rate relief looms. In their wake, private credit funds and mortgage REITs are rushing to fill the void, raising billions in opportunistic and high-yield debt strategies. The result: a bifurcated market where the cost of money rises, but liquidity, paradoxically, deepens.

Across the top 20 banks, commercial-property exposure has fallen ≈ 6–8 % year-over-year. Wells Fargo’s CRE portfolio declined 8 %, U.S. Bank –5 %, while Citi inched up 3 %. Regional players are retrenching even faster. Home Bancshares trimmed $58 M of CRE loans in Q3; Bank OZK logged $2.4 B in payoffs against just $0.7 B in new originations—a five-year low.
In practice, the pullback reflects dual pressures: regulators demanding thicker capital cushions and boards enforcing risk discipline after two years of rate volatility. For borrowers, the effect is immediate—less leverage, more documentation, longer approvals.

Meanwhile, debt funds see an opening. Private lenders now command nearly $300 B in loans from banks themselves—about 10 % of total bank credit and triple 2015 levels. Their dry powder, measured in “multiple years of deployment capacity,” is targeting transitional and distressed assets.
Funds are quoting bridge and mezzanine loans at 7–9 %, sometimes before stabilization, using flexible structures and lighter covenants. That speed carries a price: origination fees 1–2 %, spreads ≈ +500 bps over SOFR, and tight 60 % LTV limits. Yet borrowers accept the trade-off to keep projects moving.

On the ground, the lending squeeze is changing how deals pencil. One multifamily operator described refinancing “like a scavenger hunt”—their usual bank now capped leverage at 55 % LTV and required an interest reserve. Sponsors are responding by tightening operations: pushing NOI, deferring cap-ex, or inviting preferred equity partners.
This discipline may prove healthy. Debt service coverage ratios above 1.30× are becoming the new floor, effectively filtering speculative business plans. As a result, stabilized assets with predictable cash flow are commanding premium debt pricing, while transitional plays face an equity call.

Macro signals complicate the picture. Ten-year Treasury yields have retreated below 4.2 %, and futures imply a Federal Reserve rate cut before year-end 2025. Lower base rates could ease borrowing costs—but credit spreads remain elevated as lenders price risk and illiquidity.
Regulators are also considering a reduction of the community-bank leverage ratio to 8 %, potentially releasing lending capacity in 2026. For now, the gap between regulated banks and non-banks will persist, reinforcing private capital’s dominant role through at least the next two quarters.

This shift is not without systemic implications. Moody’s warns that banks’ indirect exposure—via loans to private-credit funds—may transmit risk back into the system if underwriting standards slip. The line between “shadow” and “sponsored” credit is blurring. Nonetheless, the diversification of capital sources has prevented a full-scale liquidity crisis.
In turn, developers are learning to manage multi-lender stacks—bank construction debt paired with debt-fund bridge loans or rescue mezz. The complexity raises execution risk but also widens strategic options.

Capital formation in CRE is fragmenting, not freezing. If the Fed delivers rate cuts in late 2025, benchmark costs will fall—but spreads may only narrow once confidence returns. Regulatory easing for community banks could re-introduce competition by mid-2026, yet near-term credit will remain relationship-driven and documentation-heavy.
Expect continued note sales, debt-fund portfolio buys, and opportunistic recapitalizations through early 2026. For disciplined borrowers with verifiable cash flow, liquidity exists—just at a premium. The market’s next phase hinges on who prices risk more accurately: cautious banks or yield-hungry private credit.