Economist Snapshot: Is bank stress contained?

News that Zions Bancorp reported $50 million in third-quarter losses related to commercial and industrial (C&I) loans has reignited concerns about bad debt sitting on the books of regional banks. Regional banks also hold a significant share of the roughly $1.5 trillion in commercial real estate debt scheduled to mature in 2025 and 2026, according to the Mortgage Bankers Association.

Urban Land: What is your current view on the strength of bank balance sheets, particularly regional banks, and what is your outlook for bank liquidity to support commercial real estate in the coming year?

Victor Calanog, Ph.D., managing director and global co-head of research and strategy, real estate, Manulife Investment Management

David Chang Photography

Recent news about charge-offs and fraud allegations in some banks suggest localized stress among regional commercial real estate lenders. Overall, distress does not seem systemic yet. The resumption of rate cuts offers some relief, but if long-term rates remain elevated, many lenders will remain pressured. Extensions and workouts continue. Of the $900-plus billion of commercial real estate loans set to mature in 2025, it appears up to $600 billion have been pushed to between 2026 and 2028. Bank loans represent 40 percent of this, with national banks representing 13 percent and regional banks 20 percent, with the remainder held by smaller community banks.

If banks continue to pull back, this represents an opportunity for other lenders, like private credit, to step in and fill financing gaps. The economy and commercial real estate capital markets appear to be characterized by a curious mix of anxiety amidst resilience.

Brian Bailey, senior managing director, head of research, Trimont

Currently, U.S. banks maintain generally healthy balance sheets and ample liquidity. However, several factors could challenge this stability, including economic conditions, capital availability, and the pace and depth of regulatory oversight.

Recent economic indicators reveal emerging vulnerabilities. Over the past six months, job growth has slowed, delinquent consumer loans 90-plus days past due have risen, and consumer sentiment has weakened. The “K-shaped” recovery persists, with upper-income earners seeing gains while lower-income cohorts struggle to keep pace with inflation. Elevated inflation continues to pressure both consumers and commercial real estate, as operating expenses outpace effective rent growth. These trends may dampen business earnings, particularly for small businesses, and could lead to stagflation in commercial real estate, where rent growth stagnates but costs rise.

Despite these headwinds, capital remains accessible. Both banks and non-bank lenders continue to deploy significant liquidity, and falling debt costs may spur refinancing activity and stabilize asset values, supporting troubled loans.

Regulatory oversight, however, appears to have become less rigorous. Guidance has emphasized short-term debt service over long-term repayment. Retirements within regulatory agencies risk eroding institutional knowledge. Regulator understaffing and overwork create an environment where safety and soundness items at banks can be missed or glossed over. This shift could expose banks to greater risk, as seen in recent regional bank challenges.

In summary, while bank balance sheets are resilient today, ongoing economic softness, capital market shifts, and evolving regulatory practices warrant close attention to future asset performance and risk management.

Rachel Szymanski, Ph.D., chief economist, Trepp

Banks are gradually returning to the commercial real estate debt market, and liquidity conditions appear to be on an upward trajectory. Banks overall remain well capitalized. While there have been isolated loan losses, these do not point to a broader credit issue.

Distress continues to work its way through the system, particularly in office and multifamily segments. Regional banks tend to have higher concentrations of commercial real estate assets, so performance will vary based on portfolio composition and market exposure.

The policy environment is also more stable than in 2022, when rapid rate hikes caught some regional banks off guard. This has allowed banks more time to adjust and manage exposures as conditions evolve.

Adrian Ponsen, senior economist, Investor Insights, Cushman & Wakefield

Tier 1 capital ratios are near the highest levels ever recorded for all size categories of FDIC-insured banks, including those with assets below $100 million to those surpassing $250 billion. Meanwhile, at 12.9 percent, the share of banks’ total assets comprised of commercial real estate loans is congruent with 2018 levels and only about 25 basis points above the average since 2000.

It is true that over the past 10 years, many regional banks have increased commercial real estate loans’ share of their total assets to record highs, but most also increased deposit ratios and reduced allocations to riskier consumer loans over the same period.

Year-to-date in 2025, banks’ commercial real estate loan origination is up more than 50 percent from the same period in 2024, with refinancings comprising a record-high share of new loans. Even with that jump in new originations, banks’ commercial real estate debt outstanding is barely growing, as many loans nearing maturity are being refinanced by other debt sources, and banks are selling riskier loans to private credit investors.

More stable benchmark interest rates and recent gains in institutional fundraising targeting commercial real estate should help drive further increases in bank originations in 2026. However, we expect banks’ market share to remain lower than its 2010-2019 average as debt sources continue to diversify.

Christopher Wolfe, managing director and head of North American Banks, Fitch Ratings

U.S. regional bank balance sheets have noticeably strengthened since the “strisis” (stress for most, crisis for a few) observed in March 2023. Median Common Equity Tier 1 (CET1) regulatory capital ratios are up 19 bps over the last year, while CET1 adjusted for unrealized losses is up 97 bps. Overall asset quality remains good, despite recent fraud events, with loan losses coming in within expectations.

Bank liquidity remains healthy, with loan-to-deposit ratios mostly below long-run averages; thus, banks are not constrained in lending. Banks have worked down commercial real estate exposures, and inflows into “criticized” and “classified” have stabilized or declined, signaling an end to commercial real estate woes, mainly in the office sector. With that said, banks will likely remain cautious on new commercial real estate loans and focus more on relationship borrowers and conservative structures.

Darin Mellott, head of U.S. investor research, CBRE

The banking system is well-capitalized and more resilient than it was during the years surrounding the Global Financial Crisis. Additionally, commercial real estate underwriting has remained disciplined, reducing the risk of widespread issues stemming from property markets. In recent quarters, banks have become an increasingly active source of liquidity, significantly growing their market share.

We anticipate that banks will continue to play a key role in providing liquidity to the commercial real estate sector, alongside other capital sources, supporting a sustained recovery in the commercial real estate investment market. CBRE expects that investment volumes will increase by 16 percent in 2025 compared to 2024, reflecting a broadly improving environment for capital markets.