Midwest and Southeast Commercial Real Estate Distress Is Concentrated at Mid-Sized Banks, Not the Largest or Smallest Lenders

Written by:

Rudi Davis

Date:

08 Mar 2026

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Stress in commercial real estate lending is not distributed evenly across the banking sector. Institutions with assets between $2 billion and $50 billion are generating a disproportionate share of distressed asset liquidation mandates in the Midwest and Southeast, according to Edward Durnil, President and CEO of Tranzon Asset Advisors. The pattern suggests that a lender’s size, philosophy, and portfolio approach are driving current distress levels as much as broad market conditions.

Durnil’s firm specializes in commercial real estate liquidations across the Midwest and Southeast and works primarily with institutional lenders. Tranzon Asset Advisors has observed that mid-sized banks are experiencing more distress than either the largest national banks or the smallest community lenders. “It’s that middle ground, those $2 to $50 billion lenders, that are probably having more issues than the top tier,” Durnil says.

Why Community Banks in the Midwest and Southeast Are Largely Avoiding Commercial Real Estate Distress

Community banks and credit unions, typically with assets under $2 billion, have largely avoided the surge in distressed loans. Durnil attributes that stability to traditional, conservative underwriting and a focus on established local relationships. These smaller institutions tend to avoid speculative lending and development projects, which has shielded community banks from the portfolio pressures now affecting larger regional lenders.

Durnil says community lenders’ local market knowledge and relationship-based approach act as natural risk controls. Community banks concentrate on residential mortgages and established local businesses within their immediate area. That focus means community banks rely on direct knowledge of borrowers rather than solely on financial metrics, making those institutions less likely to take on risky projects that could lead to major losses if market conditions deteriorate.

“It’s the nature of community-based lending. It’s almost always more conservative,” Durnil says. Community banks are deliberate about whom they lend to and generally avoid development loans in unfamiliar markets. Community banks’ decisions to decline loans often reflect information about borrowers or projects that would not appear in standard underwriting. That informational advantage, combined with conservative loan-to-value ratios, has kept distressed asset volumes low among smaller lenders.

Why Mid-Sized Banks Are Generating the Most Commercial Real Estate Liquidation Mandates

In contrast, mid-sized lenders have found themselves exposed on multiple fronts. Mid-sized banks lack the scale and dedicated resources of the nation’s largest banks. The largest banks can absorb losses across vast, diversified portfolios and maintain specialized asset teams to manage distressed properties. At the same time, mid-sized banks do not benefit from the close relationships and local knowledge that allow community banks to work out loans informally.

Many mid-sized banks expanded aggressively in recent years, entering new markets and asset classes without the deep local insight of community banks or the risk diversification of megabanks. As a result, mid-sized banks now face higher default rates and are more reliant on outside firms to liquidate assets. Durnil says his firm’s experience working with lenders across both regions provides visibility into these differences between institution types. Mid-sized lenders, Durnil says, are more likely to need professional asset disposition services because they lack both internal expertise in special assets and the informal flexibility available to smaller community lenders.

Institutional strategy and size are proving to be as important as market dynamics in determining which lenders are most affected by distress. As commercial real estate faces higher interest rates and softening demand, the divide among lender types is likely to persist. Mid-sized institutions are expected to remain the primary source of liquidation mandates, reflecting the structural gap between highly resourced megabanks and risk-averse community lenders.