Banks form one of the focal points of commercial real estate distress. They’re holding many loans, after all, so must be under pressure.
And they are, but often less than one might think, according to Nathan Stovall, director of financial institutions research at S&P Global Market Intelligence. He says there are multiple pressures, but that things are in better shape than often thought.
“Most bankers you talk to about this stuff are tired of talking about it because they think it’s been too overhyped,” Stovall told GlobeSt.com. “Even a few months ago you had big firms saying there will be hundreds of banks failing. I don’t see that as the case at all.”
Recommended For You
Many of the pressures on banks are more complex and less critical than they seem. For example, take accounting rules. Companies of all types can be constricted by accounting treatments, whether something like when they can recognize revenue or in this case, when they must write down assets.
Some accounting experts have told GlobeSt.com that multiple factors and conditions can affect how long an organization can hold something on the balance sheet. Some banks in 2023 were closed because they bought assets like mortgage-backed securities or Treasurys when interest rates were very low. Some were “held to maturity” while others were “available for sale.” The former type became a problem as the banks were holding assets that had significantly fallen in price but with the held-to-maturity designation, they could say the value hadn’t changed.
For CRE loans, it is different. “Every loan made is held for investment,” Stovall says. “Every loan originated as that unless you state held for sale.” Unlike with bond portfolios, the banks don’t have to mark them down. “It allows a lot of latitude.”
Next, distress levels are much lower than many in the industry had expected, even with all the news of plummeting valuations. “You’ve had a lot of money raised that banks would purge their portfolios,” Stovall explained. But there is little of such activity. “You’re seeing 5% to 10% of haircuts on overall portfolios and not a lot of those.”
One reason the distress isn’t higher is because the banks have been able to hold off better than the would-be distressed investors. They raise large sums for their funds and investors expect action. “They’re not going to give the money back [to investors],” Stovall says. “It needs to find a home and right now it’s not generating income.” So, the distress deals aren’t massive write-downs.
However, even if regulators aren’t pushing the banks to make big divestments, the attention by itself is uncomfortable. “If you have more of this, you’re in the penalty box to a certain degree,” Stovall said. Regulators aren’t forcing banks to sell, but the attention is uncomfortable and takes up resources that can’t be directed to other needs. It’s like mom constantly asking what you’re doing about cleaning your room.
The number of banks feeling the heat is relatively small. At the peak, there were 577 financial institutions with elevated CRE concentrations. The number is now down to 446. Also, the most pressure is on the largest banks with the resources to make a loan on a high-rise office tower.
These are some of the main reasons why banks aren’t collapsing under the weight of CRE loans.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
