The commercial real estate lending industry is facing a crisis that makes the familiar “perfect storm” analogy seem almost comforting. While that phrase typically refers to three converging challenges, CRE lenders today are grappling with nearly three times as many, each compounding the sector’s troubles.
High borrowing costs are the first hurdle. Years of low interest rates and high-leverage loans are now a distant memory, and refinancing remains a daunting prospect. The strain is evident in a rising number of loan delinquencies, though the pace of increase has slowed, according to Bloomberg. Distress in the sector jumped 23% year-over-year to $116 billion by the end of the first quarter—the highest level in a decade—according to data from MSCI Real Capital Analytics.
Another growing worry is the so-called “maturity wall.” As more loans come due, lenders have increasingly relied on the “extend-and-pretend” strategy, delaying the inevitable reckoning by deferring losses on their balance sheets. This approach has only allowed CRE debt to swell further, according to the Mortgage Bankers Association.
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Bank portfolios are also showing signs of strain. Past-due and nonaccrual rates for CRE loans are at their highest since 2014, according to the Federal Deposit Insurance Corp. (FDIC). Some financial institutions have even stopped tracking interest payments they no longer expect to collect, Bloomberg reports.
Policy uncertainty and market volatility are adding to the turmoil. The Federal Reserve’s May Beige Book described a slight decline in economic activity, attributing it to “elevated levels of economic and policy uncertainty.” Oxford Economics characterized the report as “a picture of an economy buckling under a cloud of uncertainty.” The Beige Book also highlighted the impact of tariffs, with all districts reporting upward pressure on prices—with some calling the increases “strong, significant, or substantial,” according to the Federal Reserve.
On top of these performance-related issues, new external threats are emerging. One such risk is the so-called section 899 “revenge tax.” This provision in recent budget and tax legislation targets what the administration views as unfair foreign taxes, such as the OECD’s Pillar 2 framework and digital services taxes, according to Grant Thornton. The concern is that this measure could drive away foreign investors, a crucial source of capital for CRE lenders.
Systemic risks are also lurking beneath the surface. Private funds in CRE lending have created hidden dangers, according to the Financial Stability Board. Banks are indirectly exposed to CRE risks through their lending to nonbank financial intermediaries, like REITs and property funds. Researchers from NYU Stern, Georgia Tech’s Scheller College of Business and the Frankfurt School of Finance have pointed out that, when these indirect exposures are considered, even the largest U.S. banks face significant vulnerabilities.
Finally, banks are sitting on unrealized losses in their securities portfolios, according to the FDIC. This is the same type of risk that led to several high-profile bank collapses in 2023, raising fears that CRE lending could follow a similar path.
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