The news: Cogent Bank, a Florida-based community bank, is expanding its focus on a niche type of commercial real estate (CRE) financing—single-tenant net lease (STNL) properties—per American Banker. It created a new division and hired a former Bank OZK executive with over a decade of experience in this area to lead the charge.

Why it matters: CRE lending has caused a lot of financial difficulties, particularly for small banks, over the past few years. But this move highlights a growing trend among community banks to seek out nationwide, specialized lending niches to overcome a period of soft credit demand. 

STNL properties—where one tenant covers all expenses—are considered a low-risk CRE asset class, often backed by the strong credit of  national retailers, restaurants, or banks. One lending expert at Bank OZK told American Banker that in over a decade of working in this area, he had “no loss exposure [from this strategy] to speak of.” This stands in stark contrast to the broader CRE sector.

Our take: This strategy has offered smaller banks in particular a way to profit on CRE loans. While some community banks might hesitate due to lower yields compared to other loan types, the strong credit performance of STNL loans makes them incredibly attractive. 

But if a single tenant defaults or goes bankrupt, the lender faces a vacant asset and the burden of finding a new tenant. This can be particularly challenging if the property is highly specialized or difficult to repurpose. Furthermore, a nationwide focus requires a higher level of operational and underwriting expertise, which can strain a community bank's resources and force it into a highly focused corner.