CRE Lending Pt. 1 — Nonbanks Fill Gaps, Not Expectations

In the early 20th century, the Waldorf-Astoria Hotel represented the pinnacle of luxury hospitality in New York City, occupying an entire city block. Once the largest hotel in the world, the Waldorf-Astoria Hotel hosted presidents, royalty, and titans of industry. By the late 1920s, however, the grandeur of the Gilded Age had faded, and high society moved uptown. The aging hotel was sold to a group of investors and promptly demolished to make way for a bold new project: the Empire State Building. Yet, weeks after demolition, the stock market crashed, triggering the Great Depression. Financing dried up, demand for office space collapsed, and most investors faced staggering losses. Instead of abandoning the project, investors secured a $27.5MM loan from Metropolitan Life Insurance Company, ensuring construction moved forward. The result? An iconic skyscraper that continues to dominate the NYC skyline.Embracing the Empire State of MindNearly a century later, commercial real estate (CRE) financing is once again in flux. Big banks are tightening lending standards, while nonbank private lenders are increasing activity. In the first few weeks of 2025 alone, private lenders originated $4.43B in short-term CRE loans, surpassing last year’s Q1 total.With private credit near $2T and more banks offloading commercial properties from their balance sheets, CRE owners and operators are still struggling to secure financing for their projects. Many report frustrating negotiations with nonbank lenders, citing slow execution and inconsistent terms.For community financial institutions (CFIs), this ongoing post-pandemic shift in the CRE lending market presents both challenges and opportunities. In this two-part series, we’ll explore how CFIs can navigate the shifting CRE lending landscape and carve out a competitive advantage. In Part One, we’ll examine the growing role of nonbanks and how borrowers perceive them.  In Part Two, we’ll explore strategies CFIs can use to compete more effectively.The Growing Role of Private Nonbank LendersNonbank lenders have rapidly expanded their role in CRE financing, capitalizing on the regulatory constraints and risk concerns keeping big banks out of the sector. Indeed, private credit’s share of the US lending ecosystem has grown by 1,000% since 2009, and McKinsey estimates another $5T-$6T in CRE loans could shift to nonbanks over the next decade.

Source: McKinsey & Company 

One of the biggest trends shaping CRE financing today is the rise of floating-rate, short-term bridge lending. LoanCore Capital, for example, recently originated a $1.15B CRE collateralized loan obligation (CLO) backed by 24 loans across multifamily, industrial, and hotel properties.From the perspective of nonbank borrowers (NBBs), the most frequently cited advantages of working with nonbank lenders are more personalized service, easier access to loans and financing, and greater lender stability, according to Altus Group. Efficiency, execution, and more flexible underwriting also ranked highly, suggesting that while private lenders may not always offer the best pricing, they attract borrowers with customization, accessibility, and flexibility.

Source: Altus Group 

However, the expanding role of private lenders for commercial projects comes with its own set of trade-offs. Private lenders often offer more flexible terms, but also charge higher interest rates than banks to manage their risk.Borrower Frustrations with Nonbank LendersWhile nonbank lenders are known for faster closing times, requiring fewer steps for borrowers to secure financing, some borrowers report longer closing times and unpredictable terms. Many nonbank lenders also lack the relationship-driven approach that smaller banks excel at, creating opportunities for CFIs to differentiate themselves.In other words, despite their growing presence, private lenders often receive lower borrower satisfaction ratings than traditional banks. A recent survey found that nonbank borrowers rate their lenders at 7.5 out of 10, compared to 8.3 for bank borrowers.

Source: Altus Group 

Key complaints of nonbank customers include:

For CFIs, this shift in the CRE lending market is an opportunity to reinforce their value as relationship-driven lenders with deep local expertise and a commitment to long-term borrower success. While nonbank lenders may offer speed and flexibility, CFIs can differentiate themselves by providing consistent, transparent, and personalized financing solutions that borrowers can rely on.Tomorrow, in Part Two of this series, we’ll explore specific strategies CFIs can use to strengthen their position, compete more effectively with nonbank lenders, and meet the evolving needs of CRE borrowers.