A time of reckoning for commercial real estate

After years of kicking the can down the road, bank lenders are calling in billions of dollars in troubled commercial real estate loans, and subsequent default rates are hitting record highs.

According to CRE data insights firm Trepp, more than 12% of office loans were delinquent, meaning the borrower failed to pay their loan on time, as of January. Trepp called it “an all-time high.”

The rise in interest rates starting in 2022 and the pressure on property cash flows has led banks to modify terms or classify certain CRE loans as troubled, assistant professor at Baruch College Department of Real Estate Maggie Hu told CFO Brew. Some loans just don’t refinance cleanly, she added.

With investors wanting to see their capital spent well and regulators pressing banks to clean up their balance sheets, banks are reaching out their palms for payment.

For CRE finance execs, it’s likely part of a cultural shift in how commercial spaces and their loans are utilized.

“Real estate investment normally is considered a passive kind of investment…now you need to look at the data—sales, vacancies, absorption rates, all these data-driven management [metrics]—in order to make a more strategic plan, in order to restructure the tenants mix,” Hu said.

Bank exposures. The Covid-19 pandemic did a number on commercial real estate, as workers stayed home and offices collected dust. Bank lenders mostly opted to lengthen maturing loans, with the hopes that the good ol’ “extend and pretend” strategy would work.

Now’s the time to collect, though, and it’s resulted in a “bifurcated and uneven” CRE industry, Hu wrote in a follow-up email, with loans on older, less popular office properties performing the worst. Additionally, 17%, or $875 billion, of all outstanding commercial and multifamily loans are scheduled to mature this year according to Mortgage Bankers Association’s 2025 “Commercial Real Estate Survey of Loan Maturity Volumes.”

While the dollar amount is “a 9% decrease from 2025’s peak, it remains a historically high volume of debt that needs refinancing,” Hu told CFO Brew.

Refinancing ultimately means losses for banks regardless of size, and smaller banks with CRE portfolios have their work cut out for them in particular, Hu said.

Regional banks “have much more exposures to the CRE loans, because many of the loans are local,” Hu said. “[They’re] more susceptible to the downturn in CRE markets, especially office.”

If losses prove too large for banks to cover, lending standards could tighten across the board, restricting capital beyond just real estate, “potentially amplifying an economic slowdown,” Hu said.

CRE companies with maturing loans, on the other hand, should prepare for possibly difficult renewal conversations before the renewal period even happens.

“[CRE companies] need to focus on communicating effectively with lenders, who may not renew their loans. Prepare updated assessment and potential solutions, not just requests for more time,” Hu said.