Private capital accelerates as traditional banks retreat from CRE lending amid rising risks

As US banks shrink their CRE loan portfolios due to regulatory caution, private credit funds are stepping up, offering flexible, higher-yield loans and reshaping the future of commercial real estate finance amid increased sector risks.

Banks are increasingly pulling back from commercial real estate (CRE) lending, making room for a surge of private capital that is aggressively pursuing CRE debt deals. This shift is occurring as banks of all sizes shrink their real estate loan portfolios, often due to regulatory caution and a preference for more stable returns, while private credit funds chase higher yields on riskier, shorter-duration loans. According to industry observers, this dynamic is reshaping the commercial real estate lending landscape, with private funds even proposing bridge loans to developers before projects reach completion, a trend that traditional banks are hesitant to follow.

Data shows that major banks have reported shrinkage in their CRE debt portfolios in recent quarters. For instance, Wells Fargo’s CRE portfolio contracted by 8% year-over-year in Q3, while U.S. Bank’s holdings dwindled by 5%. Bank of America and PNC also reported declines, albeit smaller, whereas Citi and JPMorgan Chase saw modest increases. Regional banks are similarly paring down older, distressed CRE debt to make way for new lending, but at a cautious pace. Bank OZK, a significant regional lender in construction loans, reported record loan repayments in the third quarter, doubling its year-to-date paydowns, while issuing new CRE loans at a five-year low. Its CEO, George Gleason, indicated that the bank views current lending opportunities conservatively, reluctant to engage in aggressively priced or highly leveraged deals that private funds often pursue.

The competition from private credit is stiff because these investors are eager to deploy capital—funds raised over multiple years awaiting distressed opportunities that have yet to materialize fully. This eagerness results in private funds proactively reaching out to borrowers with attractive bridge and refinance loan offers, sometimes even before projects are stabilised. J.C. de Ona, Southeast Division President at Centennial Bank, noted this trend in markets like Miami, where private capital increasingly offers better terms and more flexible loan structures compared to banks, which remain constrained by regulatory underwriting standards and credit risk limits.

While private capital seeks higher returns and may accept greater risk, banks typically aim for conservative credit quality to maintain steady earnings and meet regulatory requirements. Yet, despite ongoing challenges in the sector, including loan charge-offs and provisions, large institutions continue to report robust profits. Wells Fargo, for example, experienced $107 million in CRE charge-offs in Q3—its highest this year—though this was still down from previous quarters. The bank has simultaneously reduced its allowance for credit losses in CRE by 30 basis points, reflecting cautious optimism. Similarly, Bank of America lowered its CRE credit reserves and is budgeting for fewer losses relative to its CRE loan book. Bank OZK, while increasing its credit loss allowance modestly, saw a shrinkage in its criticized loan portfolio, aided by asset sales like the foreclosed Lincoln Yards project in Chicago.

The broader CRE market, including the office sector, shows tentative signs of stabilisation. Despite a pandemic-induced slump, office property transactions surged 42% in the first half of the year, totalling $26 billion, with vacancy rates declining in Q3, partly due to conversions of older office buildings into apartments. The Federal Reserve’s recent interest rate cuts have further improved investor sentiment, encouraging more refinancing activity over costly loan extensions. New York-based Flushing Bank’s CEO John Buran sees no systemic credit problems, only isolated issues, and anticipates a gradual increase in bank lending as market clarity improves. However, banks still face the reality of competing against private equity for deals, particularly for higher-yield loans that banks may deem too risky.

This cautious stance contrasts with the rising provisions and loan loss reserves reported by some European lenders grappling with CRE distress. German property lender Aareal, for example, booked a record $478 million in provisions last year—the highest this century—driven by challenges in both the German and U.S. markets amid falling prices and refinancing difficulties. UBS also flags commercial real estate downturns as significant risks, noting sustained weak demand and increasing borrowing costs have led to the most severe slowdown since the global financial crisis of 2008-09. UBS’s CRE exposure rose notably following its acquisition of Credit Suisse, even as it pursues ambitious environmental targets for its property lending portfolio.

U.S.-based regional banks are not immune to pressure either. New York Community Bancorp (NYCB) faces a dual challenge of reducing its heavy CRE exposure, particularly in rent-controlled multifamily properties, and diversifying its loan portfolio amid significant rating downgrades. The bank’s stock has plummeted, and its management is working on a turnaround plan supported by substantial private investment. Meanwhile, some banks such as M&T reported profit declines in early 2024, influenced by higher deposit costs and increased provisions for potential CRE loan losses, underscoring the sector’s uneven recovery.

The divergence in CRE loan exposures also reflects the varied risk appetite and regulatory environments across banks of different sizes. Smaller banks often have much higher proportions of their portfolios concentrated in commercial real estate, sometimes exceeding 48%, compared to around 13% for the largest institutions. This imbalance exposes smaller lenders to disproportionate risks if CRE loan delinquencies rise, potentially affecting their financial health.

In sum, the U.S. commercial real estate lending market is experiencing a significant structural shift. While traditional banks cautiously reduce exposure and await clearer market conditions, private credit continues to aggressively allocate capital, leveraging flexibility and risk tolerance. This environment suggests a continuing competitive tension with implications for deal structures, pricing, and the future shape of CRE finance.

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Source: Noah Wire Services

Noah Fact Check Pro

The draft above was created using the information available at the time the story first
emerged. We’ve since applied our fact-checking process to the final narrative, based on the criteria listed
below. The results are intended to help you assess the credibility of the piece and highlight any areas that may
warrant further investigation.

Freshness check

Score:
8

Notes:
The narrative is current, dated October 21, 2025. Similar themes have been reported in the past, such as the shift of commercial real estate (CRE) lending from banks to private credit funds, notably in April 2023. ([bisnow.com](https://www.bisnow.com/national/news/capital-markets/shadow-lenders-step-in-as-regional-banks-back-away-from-cre-118526?utm_source=openai)) However, the specific data points and quotes in this report appear to be original. The report includes updated figures for Q3 2025, indicating a high level of freshness.

Quotes check

Score:
9

Notes:
The quotes attributed to J.C. de Ona and other individuals do not appear in earlier reports, suggesting originality. The phrasing and context of these quotes are unique to this report.

Source reliability

Score:
7

Notes:
The report originates from Bisnow, a reputable source in commercial real estate news. While Bisnow is generally reliable, it is not as widely recognised as major outlets like the Financial Times or Reuters. The report cites specific data points and quotes, enhancing its credibility.

Plausability check

Score:
8

Notes:
The claims about banks reducing CRE loan portfolios and private credit funds increasing their presence align with known industry trends. For instance, in April 2023, Bisnow reported on the rise of private credit funds filling the void left by regional banks in CRE lending. ([bisnow.com](https://www.bisnow.com/national/news/capital-markets/shadow-lenders-step-in-as-regional-banks-back-away-from-cre-118526?utm_source=openai)) The specific figures for Q3 2025 are plausible and consistent with the current economic climate.

Overall assessment

Verdict (FAIL, OPEN, PASS): PASS

Confidence (LOW, MEDIUM, HIGH): HIGH

Summary:
The report provides current and original insights into the shift from bank to private capital in CRE lending. While similar themes have been reported previously, the specific data and quotes are unique to this report, and the source is reputable. The claims are plausible and supported by industry trends.