Tight Credit Constrains Commercial Real Estate Projects

According to the April 2025 Senior Loan Officer Opinion Survey from the Federal Reserve, moderate net shares of banks tightened standards for construction and land development and nonfarm nonresidential loans in the first quarter of 2025. Large banks reported some easing for construction and multifamily loans, while many smaller banks continued to pull back.

KPMG's 2025 analysis of late 2024 survey rounds reported that banks had tightened standards and seen weaker demand across all major commercial real estate loan types, including construction and land development and nonfarm nonresidential loans.

Senior economist Meagan Schoenberger summarized the outlook by saying, "We do not see an easing of conditions in the near term," according to KPMG.

At the same time, primary North American data center markets recorded a 1.6 percent vacancy rate in the first half of 2025 despite record inventory growth, according to CBRE research.

Data center project finance volumes reached about 113.4 billion U.S. dollars across 37 deals in 2025, based on data compiled by ION Analytics.

Bank Lending Standards Move to the Tight Side

KPMG's review of the fourth quarter 2024 Senior Loan Officer survey found that banks had tightened standards and reported softer demand across key commercial real estate categories, including construction and land development and nonfarm nonresidential loans.

The analysis emphasized that lenders entered 2025 with a cautious stance toward new CRE risk, according to KPMG.

In the April 2025 survey, moderate net shares of banks reported tightening standards for construction and land development and nonfarm nonresidential loans over the first quarter, while standards for multifamily properties were broadly unchanged on net.

The survey also showed that large banks were more likely to ease standards for construction loans, whereas other banks remained net tighteners across commercial real estate categories, according to the Federal Reserve.

By the second quarter of 2025, that split had become more visible. Large banks reported net easing in commercial real estate standards, including construction lending, while many other institutions continued to tighten.

This created a divided market for borrowers, according to the ABA Banking Journal.

These survey results indicate that tight credit conditions are now built into underwriting for many construction and nonfarm nonresidential loans, even though the intensity of new tightening has eased compared with earlier in the cycle.

The burden falls most heavily on borrowers who rely on smaller and regional banks, which remain more conservative than the largest institutions.

Project-Level Effects of Tight Credit

Special questions in the April 2025 Senior Loan Officer survey reported that banks had tightened a range of policies on commercial real estate loans over the prior year, especially for office-related exposures.

The most widely cited changes for office-backed loans were higher debt service coverage ratios and lower loan-to-value ratios, with many banks also reporting shorter interest-only periods, according to the Federal Reserve.

Banks cited less favorable or more uncertain outlooks for vacancy rates, property prices, market rents, and mortgage delinquencies, as well as reduced tolerance for risk, as key reasons for tightening credit policies on commercial real estate loans.

Those concerns raised the bar for new construction and refinancing across segments such as office, retail, and certain industrial properties.

In practice, higher coverage ratios and lower loan-to-value limits require sponsors to contribute more equity or accept smaller loan sizes. Combined with stricter guarantees, narrower market areas, and slower committee approvals, these terms can push weaker or more speculative projects into redesign, phasing, or postponement.

Projects with thin contingencies, uncertain leasing prospects, or secondary locations are the most exposed to these constraints.

Even for fundamentally sound developments, tighter structures can reduce returns or delay starts, particularly when construction costs and interest rates are already elevated.

Data Centers Stand Out in a Weak Construction Cycle

The data center sector has moved in the opposite direction. CBRE reported that primary North American data center markets reached a record 8,155 megawatts of supply in the first half of 2025, up 43.4 percent year over year, while vacancy fell to a record-low 1.6 percent.

This reflects strong demand from hyperscale cloud and AI tenants, according to CBRE.

Under-construction capacity across those primary markets reached about 5,242.5 megawatts in the same period, and roughly 74.3 percent of that pipeline was already preleased.

CBRE attributed this preleasing to cloud and AI providers locking in future capacity in anticipation of power and land constraints rather than waiting for completed shell space.

Globally, JLL's 2026 Global Data Center Outlook projects that sector capacity will increase by about 97 gigawatts between 2025 and 2030, nearly doubling to roughly 200 gigawatts.

The firm expects this growth to be driven largely by hyperscale cloud expansion and AI-related workloads, according to JLL.

S&P Global notes that U.S. data center construction spending rose 28 percent year over year in the 12 months ended June 2025, while overall private nonresidential construction spending declined 4 percent over the same period.

That divergence shows how data centers have continued to attract capital and building activity even as broader commercial construction has slowed, according to S&P Global.

How Data Center Finance Differs from Conventional CRE

S&P Global describes most recent data center projects as pre-leased or built to satisfy existing demand, rather than launched on a speculative basis.

Many wholesale facilities are backed by long-term net leases with large, creditworthy tenants, which helps support relatively stable cash flows and gives lenders clearer revenue visibility, according to S&P Global.

The same analysis notes that, despite rising investment, data center construction is limited by physical and logistical constraints such as long equipment lead times, limited suitable land, higher development costs, and challenges related to power supply availability and water.

These factors cap the number of viable projects and often must be addressed well before financing can be finalized.

S&P Global also outlines a diverse capital structure for data center investment. New construction is often funded through bank-led project finance, while stabilized portfolios tap securitization and commercial mortgage-backed securities backed by lease income.

Large real estate investment trusts use corporate bonds and other unsecured debt for their development pipelines.

According to ION Analytics, project finance lending to data centers in North America totaled about 113.4 billion U.S. dollars across 37 deals in 2025, up from 28 billion dollars across 31 deals in 2024.

This reflects a rapid scale-up in deal size and volume, as reported by ION Analytics.

Louise Pesce described this volume as "unprecedented" and said that traditional project finance banks "cannot do it all," while Ralph Cho argued that private credit is likely to become a real option as a lead provider on multi-billion-dollar data center transactions.

This mix of long-term contracted cash flows, diversified funding channels, and strong tenant demand has so far allowed many data center developers to secure financing even as bank credit for general commercial construction has tightened.

At the same time, competition to finance a limited pool of viable projects raises the risk that more aggressive structures could emerge if capital continues to chase constrained supply.

Market Implications and Forward Outlook

For mainstream commercial real estate, tighter standards and more conservative assumptions around vacancy, rents, and delinquencies translate into a higher bar for new construction.

Projects that clear that bar tend to feature stronger sponsorship, lower leverage, and more resilient cash flow profiles, while smaller borrowers and secondary markets face persistent equity gaps even if policy rates stabilize.

In data center finance, strong demand and high preleasing have so far supported pricing power and funding access, but S&P Global highlights risks if AI-driven demand were to slow or if competition pushes leverage and valuations to unsustainable levels.

Rising land and power costs, along with grid and permitting constraints, could also pressure returns if lease rates do not keep pace with development expenses.

The result is a clear bifurcation in construction financing. Sectors tied to digital infrastructure and AI can attract large volumes of project finance and private credit on the strength of contracted revenue and structural demand.

Meanwhile, more conventional property types remain closely bound to banks’ risk tolerance and regulatory constraints.

Whether this gap narrows will depend not only on monetary policy and credit spreads but also on how quickly power grids, land-use approvals, and supply chains can expand capacity for energy-intensive infrastructure.

Even if lending standards ease in aggregate, data center pipelines are likely to be governed as much by megawatt allocations and interconnection timelines as by the availability of debt.

Many other commercial projects will continue to adjust to a higher and more selective financing threshold.

Sources

• Federal Reserve System. "Senior Loan Officer Opinion Survey on Bank Lending Practices." Federal Reserve, 2025.
• American Bankers Association. "Divergence defines Q2 lending landscape." ABA Banking Journal, 2025.
• KPMG Economics. "Banks are tightening credit." KPMG, 2025.
• CBRE Research. "North America Data Center Trends H1 2025." CBRE, 2025.
• JLL Research. "2026 Global Data Center Outlook." JLL, 2026.
• S&P Global Ratings. "Data Center Risk if AI Promises Fade." S&P Global, 2025.
• ION Analytics. "LNG, data centers drive growth in project finance." ION Analytics Infralogic, 2025.