Regional Banks Navigate the Slow Reckoning in Commercial Real Estate

Regional banks are working through a slow reckoning in commercial real estate, as elevated office vacancies and higher interest rates weigh on the value of buildings that back a chunk of their loans.

The stress traces to the shift toward hybrid work, which reduced demand for office space in many downtowns. As leases expire and buildings refinance at higher rates, some owners face difficult math, and their lenders share the risk.

A gradual process

Crucially, the reckoning is unfolding over years, not in a single shock. Commercial loans mature on staggered schedules, so the pressure arrives in waves rather than all at once, giving banks time to adjust reserves and work with borrowers.

Not all commercial real estate is troubled. Industrial and multifamily properties have generally held up, and even office distress varies widely by city and building quality. Newer, well-located towers fare far better than older ones.

Watchful regulators

Regulators are monitoring bank exposure closely, mindful of the strains that rattled the sector in the recent past. Most analysts expect a manageable, if painful, adjustment rather than a systemic event, provided the broader economy stays on track.