Commercial Real Estate

Commercial real estate loans are underwritten on the property, not the borrower.

That means income (NOI) drives loan size, DSCR and LTV constrain leverage, and lender choice matters as much as rate. In CRE, the asset is the borrower.

How CRE Financing Actually Works

1. Property income (NOI) determines loan capacity
2. DSCR and LTV set hard limits on leverage
3. Lender type determines structure and flexibility
4. Strategy determines the right loan, not just rate

This distinction creates a financing landscape with its own vocabulary, metrics, and lender ecosystem. CRE borrowers interact with banks, credit unions, CMBS conduits, life insurance companies, debt funds, SBA CDCs, and agency lenders (Fannie Mae and Freddie Mac for multifamily). Each channel serves different deal profiles, and understanding which lender fits which scenario is often more important than negotiating rate alone.

CRE financing also moves on longer timelines than working capital or equipment loans. Transactions involve appraisals, environmental assessments (Phase I, sometimes Phase II), title searches, survey reviews, and lease analysis. A straightforward acquisition might take 60 to 90 days from term sheet to closing; complex deals can stretch to six months. Borrowers who understand these timelines and prepare documentation accordingly close faster and on better terms.

Lenders do not treat commercial real estate as a single category. Property type is one of the first variables in any credit decision, and appetite varies dramatically across the spectrum.

• Multifamily (5+ units): The most liquid CRE asset class. Agency financing (Fannie Mae, Freddie Mac) provides standardized terms with competitive rates. Banks and life companies also compete aggressively. LTVs can reach 75% to 80% on stabilized properties.
• Industrial and warehouse: Strong lender appetite driven by e-commerce demand and supply chain reconfiguration. Vacancy rates remain historically tight in most markets, making underwriting straightforward for well-located assets.
• Retail: Bifurcated market. Grocery-anchored neighborhood centers and single-tenant net lease properties attract competitive financing. Enclosed malls and non-anchored strip centers face tighter scrutiny and wider spreads.
• Office: The most challenged sector post-2020. Lenders differentiate sharply between Class A properties with strong tenant rosters and older Class B/C buildings with uncertain demand. Underwriting standards are materially tighter than pre-pandemic levels.
• Mixed-use: Increasingly common in urban and suburban infill. Lenders evaluate these based on the dominant use type and may require separate income analysis for commercial and residential components.
• Special purpose (hotels, self-storage, medical office): Often requires specialized lenders with sector expertise. Underwriting may incorporate operating business performance alongside real estate fundamentals.

Borrowers should identify which lender channels actively seek their property type before approaching the market. A strong deal in an out-of-favor sector will still face headwinds if presented to the wrong lender.

Business owners who occupy at least 51% of a commercial property have access to SBA 504 financing, one of the most cost-effective CRE loan structures available. The program uses a blended structure: a conventional first mortgage (typically 50% LTV from a bank), a CDC debenture (up to 40% from a Certified Development Company backed by SBA), and a borrower down payment of just 10%.

The advantage is both economic and structural. The CDC debenture carries a fixed rate for 20 or 25 years, set through a monthly debenture sale process. Because the first mortgage only covers 50% of the project cost, the bank's risk is substantially reduced, often resulting in better pricing on that portion as well. The net effect is a below-market blended rate on the total financing package.

SBA 504 loans cover acquisition, construction, renovation, and equipment that is part of the real estate project. Maximum loan amounts are $5 million for the CDC portion in most cases, or $5.5 million for manufacturing and energy projects. Land and existing debt refinance are eligible under specific conditions.

The trade-off is processing time and documentation requirements. SBA 504 transactions typically close in 60 to 90 days and require personal guarantees, business financial projections, and compliance with SBA size standards. For owner-occupants who can plan around the timeline, the long-term cost savings are substantial, often tens of thousands of dollars annually compared to conventional financing at equivalent terms.

Most CRE transactions are financed through conventional channels: bank balance sheet loans, CMBS (commercial mortgage-backed securities), life insurance company placements, and debt fund originations. Each channel offers different terms, flexibility, and borrower experience.

Bank balance sheet loans are the most common for deals under $10 million. Community and regional banks hold these loans in portfolio, which gives them flexibility on structure but also means they manage concentration risk. Typical terms are 5 to 10 year maturities with 25-year amortization, fixed or floating rates, and LTVs of 65% to 75%. Recourse is standard for smaller deals; non-recourse typically requires larger loan balances and stronger sponsorship.

CMBS serves the $5 million and above market with non-recourse, fixed-rate loans on stabilized properties. Terms are typically 5 or 10 years with 30-year amortization. The trade-off is rigid servicing: CMBS loans have specific rules about property management changes, lease modifications, and prepayment (usually defeasance or yield maintenance).

Bridge loans fill the gap for transitional assets: properties in lease-up, undergoing renovation, or with near-term value-add plans. Rates are higher (typically 200 to 400 basis points over the index), terms are 1 to 3 years, and interest-only payments are standard. The exit strategy, whether refinance into permanent financing or sale, is a critical underwriting element.

Borrowers with multiple properties or ongoing acquisition plans benefit from developing portfolio lending relationships where the bank's familiarity with the sponsor reduces friction on subsequent deals.

CRE lenders evaluate deals through a set of property-level metrics that differ significantly from the revenue and cash flow analysis used in C&I lending. Understanding how these metrics interact helps borrowers anticipate lender responses and structure deals more effectively.

• Net Operating Income (NOI): Property revenue minus operating expenses, excluding debt service and capital expenditures. This is the foundation metric; every other ratio derives from it. Lenders scrutinize the NOI calculation for unrealistic vacancy assumptions, understated expenses, or pro forma adjustments that have not been achieved.
• Debt Service Coverage Ratio (DSCR): NOI divided by annual debt service. Most CRE lenders require a minimum DSCR of 1.20x to 1.25x, meaning the property must generate 20% to 25% more income than the loan payments require. SBA 504 loans have specific DSCR requirements that vary by property type.
• Loan-to-Value (LTV): Loan amount divided by the appraised value. Maximum LTVs vary by property type, lender channel, and market conditions, but 65% to 75% is the standard range for conventional CRE. Higher leverage requires subordinate financing, mezzanine debt, or preferred equity.
• Cap Rate: NOI divided by property value. Cap rates signal market pricing and risk perception. When cap rates compress below prevailing interest rates, DSCR constraints become the binding limitation on leverage rather than LTV, which is the dynamic many borrowers have experienced in the current rate environment.
• Debt Yield: NOI divided by loan amount. Increasingly used as a supplementary constraint, particularly in CMBS. A minimum debt yield of 8% to 10% is common, and this metric can limit proceeds even when DSCR and LTV are satisfactory.

The CRE lending market in 2026 operates on a two-tier basis. Properties with strong fundamentals, stable tenancy, and favorable sector positioning (industrial, multifamily, medical office) attract competitive financing from multiple lender channels. Properties with structural challenges, particularly Class B/C office and non-anchored retail, face a constrained credit environment with wider spreads and lower leverage.

CRE loan delinquency rates have plateaued at approximately 1.56% to 1.58% for four consecutive quarters through Q4 2025, suggesting the market has absorbed much of the post-rate-hike stress without a broad deterioration. However, the data masks significant dispersion: office delinquency is materially higher than the aggregate, while multifamily and industrial performance remains solid.

The elevated rate environment has created a refinancing challenge for loans originated in 2020 through 2022 at historically low rates. Borrowers facing maturity on these loans often find that current rates do not support the same leverage, requiring equity contributions or debt restructuring at refinance. This "maturity wall" is a recurring theme in lender conversations and credit committee discussions.

For new acquisitions, cap rate adjustment is ongoing. Sellers in some sectors have been slow to accept repriced values, creating a bid-ask spread that slows transaction volume. Borrowers who can identify motivated sellers, off-market opportunities, or value-add scenarios where the business plan creates value independent of rate movements are finding less competition and more willing lenders.

Effective CRE financing strategy starts with matching the right loan structure to the business plan, not the other way around. A long-term hold of a stabilized property calls for permanent fixed-rate financing (CMBS, life company, or agency). A value-add acquisition with a 3-year renovation and lease-up plan needs bridge financing with a clear path to permanent takeout. An owner-occupant purchasing their facility should evaluate SBA 504 before any conventional alternative.

Relationship banking matters more in CRE than in most lending verticals. Banks that hold CRE loans in portfolio make credit decisions locally. A borrower with deposit relationships, operating accounts, and a track record at a specific bank will receive term sheets that non-relationship borrowers cannot access. This is particularly true in the current environment where bank regulators are scrutinizing CRE concentration ratios.

Rate lock timing is a strategic decision, not a procedural step. In a volatile rate environment, the spread between locking at application versus locking at closing can represent tens of thousands of dollars on a multi-million dollar loan. Borrowers should understand each lender's lock policy, float-down options, and extension fees before committing.

Finally, prepayment provisions deserve careful attention at origination. A 10-year loan with yield maintenance prepayment can be extremely expensive to exit early if rates decline. Step-down prepayment penalties (5-4-3-2-1 declining structure, for example) provide more flexibility. Defeasance, common in CMBS, replaces the loan's cash flows with Treasury securities and can be either more or less expensive than yield maintenance depending on rate movements. The right prepayment structure depends entirely on the borrower's anticipated hold period.

Bottom Line

• CRE loans are constrained by NOI, not revenue
• Structure matters more than headline rate
• The right lender depends on the deal, not the brand
• Strategy determines outcomes; rate is a variable, not the decision

For a detailed breakdown of CRE loan types, rates, underwriting standards, and the application process, see our Commercial Real Estate Loans financing guide.