US Banks Reach Record CRE Lending Amid Sector Challenges in H1

U.S. Banks’ Commercial Real Estate Lending Hits Record Amidst Growing Underwriting Concerns

washington D.C. – Total Commercial Real Estate (CRE) lending across United States banks soared to a record $2.08 trillion by the end of June, marking a 1.6% increase as the start of the year.This surge, equivalent to an added $32.4 billion in credit, occurred just before renewed anxieties about loan quality surfaced following losses at several regional banking institutions.

Growth Divergence Among Banks

A thorough analysis of 981 U.S. banks reveals a notable disparity in growth patterns. The leading 10% of institutions, ranked by the volume of CRE loans, collectively held nearly $1.6 trillion, registering a 1.9% increase over six months. Conversely, other banks experienced a more moderate growth of 0.5%, bringing their total share to $480.8 billion, representing 23.1% of overall lending.

Several regional banks demonstrated robust expansion, rivaling the performance of larger systemic peers. JP Morgan recorded a $4.6 billion increase,a 2.6% climb. Florida’s SouthState Bank and Virginia-based Atlantic Union Bank saw their CRE loan portfolios expand considerably, by $7.4 billion (64.3%) and $3.6 billion (44.5%) respectively.

Portfolio Adjustments and Declines

While many banks expanded their CRE holdings, others strategically reduced theirs. Flagstar Financial, now operating as New York Community Bank, experienced the sharpest decline, followed by M&T Bank, Truist, citi, and PNC Bank. First Foundation exhibited the largest proportional decrease, shrinking its CRE portfolio by 17.4%, or $915 million.

Bank	CRE Loan Book change (USD Billions)	Percentage Change
JP Morgan	$4.6	2.6%
SouthState Bank	$7.4	64.3%
Atlantic Union Bank	$3.6	44.5%
Flagstar Financial (NYCB)	–	Important Decline
First Foundation	-$0.915	-17.4%

Defining Commercial Real Estate Lending

According to 2006 interagency guidance issued by the U.S. Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, Commercial Real estate encompasses a broad range of loans. This includes construction and land progress loans – whether secured by real estate or not – loans secured by multi-family residential properties,and loans secured by non-owner-occupied,non-farm commercial properties.

Regulators closely monitor banks with a CRE concentration ratio exceeding 300% relative to Tier 1 capital plus loan allowances if CRE exposure has grown by 50% or more in the preceding three years. Such institutions are subject to heightened scrutiny.

Recent Concerns and Market Signals

Allegations of fraud involving CRE investor Andrew Stupin, impacting Western Alliance Bank and Zion’s Bank, have reignited discussions surrounding potential weaknesses in underwriting standards. Despite the overall growth in CRE lending during the first half of the year, certain sub-sectors have experienced softening activity.

Construction and land development loans, typically longer-term investments, decreased by 2.8% in the first half, with the most significant decline occurring in the second quarter. The balance at the end of June reached $353.3 billion,down 6.4% from the first quarter of 2023.

High-volatility CRE loans, representing a more leveraged segment with a higher risk weighting, also saw a decline of 5.5% during the same period, reaching a record low of $26.3 billion.

While some banks like Flagstar and Valley National Bank remain above concentration thresholds, the broader trend indicates a gradual reduction in balance sheet exposure.Aggregate CRE exposure, as of the end of June, stood at 369% of banks’ Tier 1 capital and allowances, down 63 percentage points from the peak in the second quarter of 2023.

The key question remains whether this calculated deleveraging can continue independently or if another unforeseen market shock will precipitate a broader financial crisis.

Understanding CRE Concentration Risk

The regulatory guidance on CRE concentration is designed to prevent banks from becoming overly exposed to downturns in the commercial real estate market. A high concentration increases a bank’s vulnerability to losses if property values decline or if borrowers default on their loans. Regular monitoring and proactive risk management are crucial for maintaining financial stability.

Did You Know? The definition of CRE has evolved over time, reflecting changes in the financial landscape and the types of real estate financing available.

Pro Tip: Banks should diversify their loan portfolios to reduce CRE concentration risk and enhance overall financial resilience.

Frequently Asked Questions about Commercial Real Estate Lending

What are your thoughts on the future of commercial real estate lending? Do you believe the current deleveraging trend is sufficient to mitigate risk?

Share your comments below and engage in the conversation!

Here are three PAA (Purpose, Audience, Action) related questions, each on a new line, based on the provided text:

The Surge in Commercial Real Estate Lending

Despite growing concerns surrounding the commercial real estate (CRE) market, US banks reported record levels of lending in the first half of 2025.This seemingly counterintuitive trend raises questions about risk appetite, market dynamics, and the future of CRE financing.Total CRE loan portfolios across the nation’s banks reached an unprecedented $3.8 trillion,a 7.2% increase year-over-year. This growth is particularly notable given the headwinds facing the sector, including rising interest rates, remote work trends impacting office space, and retail sector disruptions.

Key Drivers Behind the Lending Increase

Several factors contributed to this surge in commercial mortgage lending:

* Strong Demand: Despite economic uncertainty, demand for CRE financing remained robust, particularly in industrial and multifamily sectors.

* Competitive Market: Banks actively competed for CRE business, driving down lending margins and encouraging increased loan volume.

* Refinancing Activity: A meaningful portion of the lending increase was driven by borrowers refinancing existing debt to lock in favorable terms or extend loan maturities.

* Construction Lending: Continued progress in high-growth areas fueled demand for construction loans, particularly in the Sun Belt region.

Sector-Specific Trends in CRE Lending

The increase in CRE lending wasn’t uniform across all property types. Certain sectors experienced more significant growth than others, reflecting shifting market conditions and investor preferences.

Office Lending: A Growing Concern

While overall CRE lending rose, office loan growth slowed considerably. Banks are becoming increasingly cautious about lending against office properties due to:

* High Vacancy Rates: The rise of remote work has led to increased office vacancy rates in many major cities.

* Declining Property Values: Reduced demand has put downward pressure on office property values.

* Increased Risk of Defaults: Concerns about tenant solvency and lease renewals are raising the risk of loan defaults.

Multifamily Lending: Continued Strength

Multifamily lending remained a bright spot, with banks continuing to aggressively finance apartment complexes and rental properties. This is driven by:

* Strong Rental Demand: High housing costs and limited homeownership opportunities continue to fuel demand for rental housing.

* Favorable Demographics: Demographic trends, such as the growth of young adults and single-person households, support continued demand for multifamily housing.

* Relatively Low Risk: Multifamily properties are generally considered less risky than office or retail properties.

Industrial Lending: A Key Growth Area

Industrial real estate experienced substantial lending growth, driven by the e-commerce boom and the need for increased warehouse and distribution space. Key factors include:

* E-commerce Expansion: The continued growth of online retail is driving demand for industrial space.

* Supply Chain Reshoring: Companies are increasingly reshoring manufacturing operations, leading to increased demand for industrial facilities.

* Limited Supply: The supply of industrial space is constrained in many markets, driving up rents and property values.

Retail Lending: Navigating a Changing Landscape

Retail lending showed modest growth, with banks focusing on well-located, high-performing retail properties. The sector continues to evolve, with a focus on:

* Experiential Retail: demand for retail spaces offering unique experiences, such as entertainment and dining, is growing.

* Omnichannel Retail: Retailers are increasingly integrating online and offline channels, requiring flexible retail spaces.

* Grocery-Anchored Centers: Grocery-anchored shopping centers remain relatively stable, attracting consistent foot traffic.

Regulatory Scrutiny and Risk Management

The surge in CRE lending has attracted increased scrutiny from regulators, who are concerned about the potential for systemic risk. The Federal Reserve, FDIC, and OCC have all issued guidance emphasizing the importance of sound risk management practices for CRE lending.

Key Regulatory Focus Areas:

1. Loan-to-Value (LTV) Ratios: Regulators are closely monitoring LTV ratios to ensure banks are not overextending themselves.
2. Debt Service Coverage ratios (DSCR): Banks are expected to maintain adequate DSCRs to ensure borrowers can meet their debt obligations.
3. Stress Testing: Banks are required to conduct stress tests to assess the impact of adverse economic scenarios on their CRE portfolios.
4. Concentration Risk: Regulators are monitoring banks’ exposure to specific CRE sectors and geographic regions.

Impact of rising Interest Rates

The Federal Reserve’s aggressive interest rate hikes have significantly impacted the CRE market. Higher interest rates have:

* Increased Borrowing Costs: Making it more expensive for borrowers to finance CRE projects.

* Reduced Property Values: Putting downward pressure on property values.

* Slowed Transaction Volume: Leading to a decline in CRE sales activity.

* increased Cap Rates: Reflecting the higher cost of capital and increased risk.

Case Study: Regional Bank exposure to CRE

The challenges facing the CRE sector were highlighted in early 2023 with the failures of Silicon valley Bank and Signature Bank. While not solely attributable to CRE exposure, significant concentrations in commercial real estate loans played a role in their downfall. These events served as a stark reminder of the risks associated with concentrated CRE lending and prompted increased regulatory oversight.

Practical Tips for CRE Investors and Lenders

* Due Diligence: Thoroughly assess the financial health of borrowers