The resurgence of bank lending to the commercial real estate industry has created stiff competition, even for the banks that loaned consistently through the downturn.

Regional banks’ return to and private debt funds’ expanded presence in the market has created stiff competition to loan to the most desirable projects, according to Houston executives at San Antonio-based Frost Bank, which had a $10B CRE loan book as of Sept. 30.

Commercial real estate debt issued by banks spiked 85% compared to last year after banks spent the past year cleaning their books of underperforming debt.

Commercial real estate has “always been a highly competitive segment of banking,” Richard Mann, Houston region president at Frost Bank, said in an interview with Bisnow.

“You only have a handful of really good, solid developers that every bank wants to do some type of business with, and there's only so many projects that they have to give out,” Mann said.

Frost competes for deals but won’t adjust terms beyond its comfort level, said Anna Pawlik, executive vice president of CRE banking for Frost.

The bank is more likely to lose deals based on structure than pricing, meaning it can adjust its interest rates and fees but is unlikely to change its requirements for equity versus debt and loan guarantees.

“We certainly are in the game to win, but in some cases the best deals are the ones that you don't do,” Pawlik said.

Frost is consistent and disciplined, which is why it has continued funding real estate while many other lenders pulled back. Right now in Houston, Frost is seeing the most activity in retail development and some industrial projects, she said.

Frost’s CRE loan book increased from just below $10B at the end of last year to just above $10B at the end of September, according to a Securities and Exchange Commission filing. But national bank CRE debt origination shot back up to 2019 levels, according to Newmark’s third-quarter capital markets report. 

Debt fund financing and securitized lending are “steadily gaining ground,” but banks are still the most common source of CRE financing, making up about 38% of all CRE lending this year, according to the report.

“We compete with all of the above,” Pawlik said.

But that can be a positive, she said. Frost is a relationship-based bank and may not be willing to take on a loan that a debt fund would.

“If we know a developer or somebody is just looking to place a loan somewhere, it may not be a good fit for us,” Pawlik said. “So a debt fund may be a good option for them.”

CRE origination activity rose 48% year-over-year compared with the first three quarters of 2024, and the gains reflect renewed confidence among investors and lenders, per the Newmark report. Origination activity increased across all major sectors, with office, senior housing and retail leading the way.

Lending is expected to continue picking up, as there are about $2T in debt maturities coming due by 2027, which will bring demand for refinancing or sales. About $573B of those loans are considered at risk of distress, according to Newmark.

Growing merger and acquisition activity like SouthState Corp. merging with Independent Financial and Veritex becoming part of Huntington Bank could impact bank lending to Texas CRE as the joint banks determine what their allocation targets will be, Pawlik said.

“It’s a very interesting landscape right now, so we’ll see where that takes us,” Pawlik said.