As the nation’s largest banks unveil their quarterly results, a cautious optimism is emerging around the commercial real estate sector, long a source of concern amid shifting economic conditions. Major U.S. banks Wells Fargo, JPMorgan Chase, and Citigroup reported earnings this week, and as CoStar observed, credit quality in the commercial real estate industry has begun to normalize.
Wells Fargo led the charge with its second-quarter results, offering a notably positive update. Charles Scharf, the bank’s CEO, told investors during the earnings call that “we maintained our strong credit discipline and credit performance continued to improve in the second quarter with lower net loan charge-offs from both the year ago and the first quarter,” according to a transcript provided by S&P Global Market Intelligence. He noted that losses had improved in both consumer and commercial loan portfolios compared to the previous year.
The bank’s financial report revealed that Wells Fargo’s total allowance for credit losses (ACL) increased modestly by $16 million, yet the allowance coverage ratio for total loans declined slightly by three basis points from the second quarter of 2024 and one basis point from the first quarter of 2025.
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Specifically, the CRE office loan ACL, a key indicator of potential losses in that sector, decreased by $105 million to $2 billion, primarily due to net loan charge-offs. This figure, as a percentage of loans, remained stable quarter-over-quarter at 7.9%. Within Corporate and Investment Banking, the CRE office ACL ratio edged down marginally to 11.1% from 11.2%.
Adding to the encouraging trends, CRE nonaccrual loans—a category that documents borrowers are behind on payments—fell by $280 million, or 7%, to $3.6 billion in the quarter. This decline included a significant $365 million drop in CRE office nonaccrual loans, driven by payoffs and paydowns that outpaced loans slipping into nonaccrual status.
In line with this, CoStar reported that loans where borrowers missed payments declined 3.2% from the previous quarter to $7.96 billion, as banks actively reduced their holdings of nonperforming loans, especially those tied to office properties.
JPMorgan Chase also tempered concerns with its latest figures. The bank’s provision for credit losses plummeted by nearly 14% from $3.31 billion in the first quarter of 2025 to $2.85 billion in the second quarter. When compared year-over-year, this figure fell 6.7% from $3.05 billion in Q2 2024. These numbers suggest an improving trajectory for credit loss provisions amid a challenging broader economic backdrop.
Citigroup’s data echoed this pattern of modest improvement. Their allowance for credit losses on loans as a percentage of total loans stood at 2.70% in the first quarter of 2025, declining slightly to 2.67% in the second quarter. These levels remain roughly in line with 2.68% recorded in the second quarter of 2024.
Industry observers, such as Gerard Cassidy, co-head of global financials research at RBC Capital Markets, have also noticed this shift. In a July 2 research report cited by CoStar, Cassidy remarked that “credit quality has started to normalize for the industry.” However, he cautioned that banks may still need another 12 to 18 months to reduce nonperforming office loans to manageable levels.
Wells Fargo’s Chief Financial Officer, Michael Santomassimo, summarized the sentiment during the earnings call, noting that commercial real estate losses decreased during the first quarter. “Valuations appear to be stabilizing, and although we expect additional losses, they should be well within our expectations.”
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