Dr. Gleb Tsipursky – The Office Whisperer
Nirit Cohen – WorkFutures
Angela Howard – Culture Expert
Drew Jones – Design & Innovation
Jonathan Price – CRE & Flex Expert
A year ago we looked at the implications for the US financial system of the fall in office values and the rise in vacancy rates in the major US markets. Twelve months on we thought we should take another look at this important topic and see whether things had changed.
Over the last year, headlines about the US commercial real estate (CRE) market have ranged from ominous to cautiously optimistic. As CRE loans mature and vacancy rates fluctuate, is this the catalyst for the next major shock, or a challenge the system can absorb? Here’s an updated look at the facts, the risks, and the nuances underpinning the current debate.
Market Snapshot: CRE Lending in 2025
CRE loan activity in the US rebounded in early 2025. The CBRE Lending Momentum Index jumped 13% in Q1 2025 and is up 90% compared to last year, reflecting renewed financing demand and robust activity from banks. Lending has been buoyed by stabilizing interest rates—prime rates are down by 1% since early 2024—encouraging more property owners to refinance or transact. This influx has fuelled a modest recovery in CRE valuations after steep falls in 2022-2023.
CRE loans remain a substantial part of US bank assets, totalling slightly over $3 trillion at the end of 2024. These loans are not evenly dispersed: large banks (assets over $100 billion) typically have 10–15% of their loan portfolios in CRE, while some mid-size and smaller regional banks exceed 30%. As much as $1.2 trillion in CRE debt has been deemed “potentially troubled” due to high leverage and falling underlying property values, with $626 billion in office debt alone maturing by the end of 2025.
Bank Exposure: Not All Time Bombs Are Equal
The largest US banks (JPMorgan, Bank of America, etc.) have diversified portfolios, with CRE loans making up 6–21% of total loans. Most maintain significant reserves for anticipated property losses. Smaller banks carry higher proportional CRE exposure. Among the largest 158 US banks, 59 have CRE exposures exceeding 300% of their equity capital—Flagstar, Zion Bancorp, Synovus, and Valley National Bank among the most at risk. New York Community Bancorp, for instance, has 57% of its loans in CRE and reported a $2.7 billion loss in late 2023, leading to a credit downgrade and recapitalization.
Loan Delinquencies and Defaults: Warning Signs, Not Systemic Collapse
CRE loan delinquencies have edged higher. By Q4 2024, the delinquency rate reached 1.57%, or about $47 billion in loans, the highest in a decade but still well below crisis levels. Charge-offs remain muted at 0.26% of CRE loans, as banks continue to restructure or “extend and pretend” rather than foreclose.
Fitch Ratings forecasts a deterioration in CRE credit through 2025, especially in office loans, projecting US CMBS (commercial mortgage-backed securities) delinquencies to rise from 2.25% in late 2023 to nearly 5% by the end of 2025. Multifamily and retail properties have seen rising delinquencies as well.
Underlying Property Trends: Patchwork Performance
The CRE market’s health diverges sharply by property type and geography.
The office remains the epicentre of risk. Office values have fallen about 30% since the 2022 peak, with high vacancies in tech-centric cities. Many landlords are incentivized to hand keys back to lenders rather than continue servicing underwater debt.
Multifamily and retail properties generally remain more resilient, but pockets of stress exist—especially among older apartment assets and less desirable malls. Industrial property performance has normalized after years of outperformance driven by e-commerce.
As always in real estate, conditions differ across markets. Those dependent on tech or specific industries, such as San Francisco, see more pronounced office distress, while others are holding up better.
Mitigating Factors: Not a Repeat of 2008
Despite pronounced stress, several factors buffer the system against immediate collapse: first there is only moderate systemic risk. Simulations still suggest a 10% loss in CRE asset values would render just 2% of banking assets insolvent—painful but not catastrophic for the overall system; second there is increased regulatory oversight: Regulators have demanded more frequent stress testing, tighter lending standards, and higher loss reserves, especially from CRE-heavy banks.
A new factor in the last year or so is the rise of non-bank lenders. Private debt funds, life insurers, and fintech-driven alternative lenders are filling gaps and diffusing concentration risk away from banks.
Persistent Risks and Challenges
As we have noted before, the tactic of “extend and pretend” (where banks extend the maturity of loans to weak borrowers and pretend that they will eventually be able to repay) remains widely used, buying time but also potentially postponing a reckoning. On the positive side, delinquency and default rates, while rising, still lag past financial crises, partly due to ultra-low interest rates persisting until late 2023. Now, higher refinancing costs and tighter credit could increase distress through 2025 and beyond if vacancy rates remain high.
Key risks include: loan maturities because large volumes of potentially troubled loans, especially in the office and multifamily segments, are due for refinancing over the next 18 months—often at higher rates and lower values. This will require delicate negotiation.
It is important that there is give and take in these negotiations as heavily-exposed regional banks, with limited diversification and smaller capital bases, are vulnerable to failure or forced consolidation if defaults accelerate.
Aside from banks, insurance companies with significant CRE investments, could face losses if asset values fall further, though the sector is less transparent than banking so we do not have a clear picture as to what the situation is in that sector. In addition, local governments are disadvantaged by falling CRE valuations as property taxes provide a crucial revenue source for many cities.
Strategies and Outlook: Adaptation Amid Uncertainty
What are institutions and regulators doing to manage the risks?
Heightened regulatory scrutiny and frequent stress tests for CRE-heavy banks, as already noted; together with increased loan loss provisioning and capital cushions at major institutions. Proactive workouts, restructurings, and strategic property disposals, especially of obsolete office buildings and the growing use of private and non-bank capital as banks limit new CRE lending.
Conclusion: Nuisance, Not Detonation
While commercial real estate remains stressed—particularly for offices and for certain regional banks—“time bomb” may overstate the case for the financial system as a whole. Losses will almost certainly rise, and bank failures, loan restructurings, and market corrections are likely. However, the combination of regulatory vigilance, portfolio diversification at larger banks, and growing use of non-bank capital suggests a scenario of localized shocks rather than widespread devastation.
The CRE sector is set for a protracted adjustment. Some institutions, markets, and asset types will suffer more than others. For vigilant banks and investors, however, volatility may also present opportunities. As ever, cautious optimism, with a close eye on evolving risks, remains the most rational approach.
