Credit unions across the country are navigating a commercial real estate (CRE) environment defined by volatility, concentration risk and shifting property fundamentals. Commercial loans at credit unions increased by $19.6 billion to $188 billion in Q3 2025, now representing 7.8% of total credit union loans. At the same time, delinquency rates have risen 19 basis points year-over-year to 109 basis points. While growth in commercial lending reflects opportunity and diversification, it also increases exposure when markets soften.
Having worked alongside credit unions nationwide to service loans and manage portfolios, I've seen what separates successful recoveries from avoidable losses. Distressed commercial real estate does not have to become a crisis, but it does require discipline, documentation and decisive action. Here are six approaches we have identified that separate successful recoveries from increased losses.
1. Start With the Story Behind the Loan
Every troubled loan has a backstory, and it rarely begins with the first missed payment. Effective workout strategies start with a comprehensive review of the original credit approval, underwriting assumptions and sources-and-uses of funds. Compare what was promised with what has actually occurred. Was a cash-out used as intended? Were tenant improvements completed? Did guarantor liquidity deteriorate before performance declined? In many cases, identifying where the borrower diverged from the original plan provides critical leverage in negotiations and, if necessary, legal proceedings.
2. Act on Early Warning Signs
Defaults rarely happen overnight. Declining occupancy, delayed financial reporting, deferred maintenance or shrinking debt service coverage ratios typically appear months before delinquency. Annual term loan reviews allow credit unions to monitor key performance indicators such as occupancy trends, lease rollover exposure and borrower liquidity. These, along with regular property inspections and covenant testing are key risk management tools for managing the portfolio and exposing risks. Intervention at the onset of an issue can help stabilize a situation before it becomes a loss event.
3. The Power of Good Documentation
In special assets, documentation is your protection. When a borrower enters technical default, such as failing to provide financials or ignoring a specific covenant, formal notices should be issued promptly, citing the specific loan agreement provisions. All communications should be memorialized in writing. Clear documentation accomplishes two critical objectives: First, it reinforces the seriousness of contractual obligation, and second, it preserves the credit union's legal position if foreclosure, bankruptcy or guarantor action becomes necessary. Professional, consistent documentation strengthens outcomes, reinforces the commitments made by the borrower and places the responsibility directly on the borrower to comply.
4. Know the True Value of Your Collateral
Workout strategy must be grounded in current market reality, not historical appraisals. Commercial property values can shift quickly due to vacancy, interest rate changes, cap rate expansion or sector-wide disruption. Updated appraisals are often required, but credit unions should also obtain broker price opinions from multiple active commercial brokers to assess real-time demand and market sentiment. Understanding current value allows credit unions to evaluate foreclosure and disposition options, note sale alternatives, varying loan restructuring scenarios and borrower equity contribution opportunities. The goal is not simply recovery; it is maximizing recovery while minimizing carrying costs and legal expense.
5. Adapt to Market Shifts
The commercial real estate market is not static. Office demand has changed due to remote work. Retail performance varies widely depending on tenants and geography. Industrial and specialty sectors face their own supply-demand pressures. Credit unions must regularly update valuations throughout workout processes and evaluate all exit options, as a strategy that made sense six months ago may no longer align with current market conditions. Immediate sales work best when buyer demand remains strong, while patient marketing may pay dividends when targeted improvements can boost values substantially.
6. Different Skills for Different Responsibilities
Managing distressed CRE requires different skills than originating loans. Successful credit unions recognize that special assets management demands expertise in negotiation, valuation, bankruptcy processes, foreclosure law and asset disposition strategy. Many institutions are building specialized asset management teams with standardized procedures, borrower communication templates and escalation protocols. Every troubled loan is unique. Standard frameworks combined with experienced judgment lead to stronger, more consistent recoveries.
Looking Forward
Beyond individual loans, credit unions must evaluate portfolio-wide exposure. Concentrations by property type, geography, borrower sponsorship or interest rate sensitivity can create correlated stress during economic downturns. Scenario testing, such as rising rates, declining occupancy, cap rate expansion, should be part of ongoing portfolio oversight. Understanding where vulnerabilities exist allows leadership to take action before problems compound.
Commercial lending remains an important and mission-aligned growth opportunity for credit unions. But growth without discipline increases risk. The institutions that succeed in today's environment will be those that combine proactive monitoring, strong documentation, current market insight and specialized expertise. With the right strategies in place, credit unions can manage distressed assets effectively, while continuing to serve members and communities through responsible commercial lending.
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