A “Flicker of Life” in Regional Bank CRE Lending: Q&A with HKS Real Estate Advisors’ Michael Lee 

Following almost three years of subdued engagement, regional and community banks are returning to the commercial real estate sector, acting swiftly to capture emerging opportunities. 

Michael Lee, partner at HKS Real Estate Advisors, has directly observed this comeback. With borrowers settling existing loans earlier than anticipated, these banks are now flush with liquidity and keen to fund new projects. In a recent office deal facilitated by HKS in the tri-state region, a regional bank extended a compelling 6.3% interest rate, underscoring their return to the market. 

Lee remains optimistic about the sector’s outlook, dismissing concerns that a looming recession will hinder commercial real estate. He views the current environment as ripe for expansion, noting that regional and local banks, with their strong community ties and agile operations, are ideally suited to pursuing transactions that larger, more conservative institutions might bypass. 

CM: You’ve noted a strong comeback from regional and local banks in commercial real estate lending. What’s driving this shift?  

ML: We believe there is a flicker of life in the regional bank space, but I would caution characterizing it as “strong”. The momentum appears largely driven by the fact that many lenders have originated very few loans over the past three years or so, while simultaneously seeing payoffs on loans that have reached maturity. Most of the concern around impaired loans seems relatively isolated across lenders. Additionally, the presence of private debt funds, cash buyers, and traditional financing options has created multiple paths for borrowers to pay off loans with local and regional banks.  

CM: You mentioned a recent deal with a 6.3% interest rate offer. How competitive is that in the current environment?  

ML: We’ve seen a few deals come in at this rate. For smaller multifamily properties, that’s considered relatively strong pricing. Interestingly, we’ve even received 6.3% offers on office and other commercial properties, which is viewed as extremely aggressive in today’s environment.  Ultimately, the size of the loan, leverage point, and market can swing pricing cheaper. We recently closed a $3 million multifamily deal in New Jersey at 5.99%, and we’re seeing quotes from government-sponsored agencies on larger loans, around $40 million, coming in as low as 5.20%. So, for certain deals, rates can compress even further.  

CM: With a potential recession on the horizon, why do you see a window for a resurgence in real estate?   

ML: While the stock market has delivered impressive returns recently, it is unrealistic to expect that kind of performance to continue indefinitely. Real estate remains a haven for both domestic and international capital seeking protection from market volatility and inflation. In addition, capitalization rates have risen slightly compared to a few years ago, and the cost of debt has eased somewhat from the highs seen between 2023 and 2025.  

CM: What advantages do regional and local banks have over larger institutions in this market?  

ML: Smaller banks typically benefit from a flat organizational structure, where the individual originating a loan can be integrally involved in loan approval. This can result in a more accurate and streamlined soft quoting process with less risk of re-trading loan terms. Additionally, most smaller lenders offer a built-in “good faith rate lock” whereby they will fix your interest rate at term sheet for 60-90 days. Although they retain the legal right to change the rate before closing—especially in the event of a major market shift—they typically honor their original quote within that time frame.  

CM: What types of deals are these banks prioritizing?  

ML: The primary focus continues to be on multifamily and mixed-use properties. That said, lenders are also open to financing retail, industrial, hospitality, and medical office assets, provided they are of moderate to high quality. Some banks are prioritizing relationships with sponsors who have strong balance sheets, while others are targeting short-term bridge loans and construction financing.  

CM: What are the key challenges in underwriting a loan given today’s interest rate volatility?  

ML: During the loan marketing process, interest rates and terms can change many times or daily. When we collect and compare quotes from banks, it is often necessary to re-price the same deal two or three times. Quotes ultimately expire faster under a volatile market.  Additionally, local and regional banks are more constrained compared to 2019 and earlier, which means there are fewer lending options available. As a result, the range of terms has widened. Loan proceeds, interest rates, fees, recourse provisions, and deposit requirements (if any) now show greater variability, making the initial loan sizing process more complex.  

CM: Are there specific property types that lenders are currently more inclined to finance?  

ML: Lenders are primarily targeting multifamily and mixed-use properties, though they may consider other asset types on a case-by-case basis.