Banks Jump Back Into CRE Lending, Even As Debt Risks Linger

After a long freeze, banks are warming up to commercial real estate debt again. But the backlog of iced-up deals and distressed loans is only beginning to thaw.

Loan origination from banks is nearing prepandemic levels as transaction volumes rebound and valuations stabilize. Lenders are stepping back into the market even as delinquencies sit near decade highs and extensions on troubled loans remain widespread.

Banks have been working through old debt at a measured pace this year, but that slow burn of deals could turn into a fire sale if economic conditions deteriorate.

“I would expect that in 2026 you'll start to see more of that final resolution type of deal, just because the banks do want them off of their books,” said Joe Biasi, who leads commercial capital markets research at Newmark. “It's just hard to find a solution when there's so many problems.”

Banks are trying to offload the debt in part to free up capacity to underwrite new loans. After retreating from commercial real estate as the sector looked for its postpandemic footing, banks are back, issuing $227B in debt in the first nine months of the year, 85% more than last year and roughly in line with 2019, according to Newmark.  

The increase in issuance follows a broader rebound this year across the CRE sector, with sales volume beating expectations from the start of the year and totaling $42B in September alone.

“I get the feeling that people are cautiously moving forward in the bank space,” said Ian McCready, the director of lending product advisory at Trepp. “We've seen record issuance in the securitized space, the CMBS market, but we've seen a very slow return in all of our banking data to where things were.”

Still, bank loan origination in the second quarter was at its highest level since 2022, according to Trepp’s Anonymized Loan-Level Repository. The T-ALLR data, which comes from roughly 20 large and midsize banks that opt in, captured more than $6B in commercial mortgage originations from April through June. 

Roughly half of second-quarter bank debt went to multifamily assets, and debt issuance for office buildings, the third rail of CRE in the recent past, is rising. 

“The fact that they are deploying capital, and they're deploying capital into office — not as much, but they are deploying capital in office — tells me that they feel good about where values are today,” Biasi said. 

But issues still loom over much of the debt underwritten during the prepandemic era of lower interest rates and higher valuations. CRE loan delinquencies at banks are near their highest level since 2014 after a run-up that began in 2022, according to Federal Reserve data. 

Roughly 1.56% of banks’ CRE loan volume is delinquent, meaning the borrower is at least a month behind on payments. The rate has held flat over the course of the year, but it remains at a level not seen since 2014, according to Fed data. The 100 largest banks have an even higher delinquency rate of 1.86%.

The number of nonperforming loans, debt that’s not only past due but also has a low likelihood of getting current, continues to rise across the banking sector and is around a decade high at banks with debt portfolios above $50B, according to Newmark.

Charge-offs, where a bank accounts for realized credit losses on its balance sheet, remain historically elevated but declined quarter-over-quarter in the first half of the year, according to Trepp’s report published in October. 

The data suggests stability, but McCready said that is driven more by lender behavior than by improving fundamentals.

“In the long run, it all makes sense, but in the short term, it’s all very much psychology-driven and sticking to the crowd,” he said. “It’s not just banks. Nobody is saying, ‘We’re just going to take all of the losses now and get back to operating and be done with this cloud.’ Everyone wants to wait and see.”

Modifications and extensions, especially for performing loans, remain popular short-term solutions. Regulatory disclosures from banks showed that extensions are a popular option for borrowers facing distress, analysts wrote in a September note from Moody’s Ratings. 

The approach, dubbed extend-and-pretend by market insiders, helped push overall commercial mortgage maturities in 2025 to $957B, with banks holding on to $452B of that total, according to Newmark. The variance in modifications has created more of a wave than a wall, with total maturities exceeding $350B each year until 2030. 

Banks have the greatest exposure of any lender type for at least the next two years, including 46% of the $663B in commercial mortgages set to mature in 2026. 

“That sifting and sorting to find out who the true losers are and where the losses come down is going to continue — slowly, if there's no inciting incident, and then perhaps very suddenly if there is an inciting incident,” McCready said.

There’s always the potential that debt markets and the broader economy will be toppled by some unpredictable event, commonly referred to as a black swan, but the current macroeconomic background is particularly frothy.

President Donald Trump’s effort to reshape global trade via tariffs has profoundly rippled through markets. An economic soft landing, where the Fed pulls inflation back to its 2% target without meaningfully impacting the job market, seemed on the horizon a year ago but is now effectively dead. 

The most likely direction for the economy today is stagflation, where stubborn inflation combines with low growth to create a general malaise. The odds of stagflation are a coin toss, with a 30% chance of a recession and a 20% chance that economic growth keeps a moderate pace even as inflation remains above target, according to Newmark. 

Moody’s economist Mark Zandi said there was an “uncomfortably high 48% probability” of a recession in the next year in a post on X in September. UBS was more pessimistic two weeks before Zandi’s post, putting the odds of a recession at 93%. 

There is an uncomfortably high 48% probability that the U.S. economy will suffer a recession in the next 12 months. That’s according to Moody’s recently unveiled leading economic indicator, derived using a machine learning algorithm on our extensive databases. It’s less than 50%,… pic.twitter.com/AGuEJznDzQ

— Mark Zandi (@Markzandi) September 14, 2025

On the other side of the ledger, Goldman Sachs put the chance of a recession over the following 12 months at 35% in June, and J.P. Morgan put its recession likelihood at 40% in May.

An economic downturn would likely accelerate the unwinding of challenged loans on banks’ balance sheets, with more borrowers struggling to stay current pushing up delinquency rates.

“If they see a recession come through, they'll have to make harder choices about the amend-and-extend profile,” McCready said.

A reckoning could come without a recession if sticky inflation forces the Fed to backtrack on its monetary easing and raise rates, McCready said. 

Much of today’s troubled debt is from the era of rock-bottom interest rates, and, after the Fed began to tighten monetary policy in early 2022, extensions became a common bridge to get borrowers over what was expected to be a short-lived spike that would be slashed once inflation was pulled down. 

Despite never reaching the 2% inflation target, Fed officials began easing monetary policy in September 2024 and have since shaved a combined 150 basis points off its benchmark rate. That’s helped pull down debt costs and push some refinancing into tenable territory. 

But Fed officials are deeply divided about the direction of the economy and the best path forward. If the central bank’s inflation hawks win out, they could vote to increase the benchmark interest rate, bucking expectations in a move that would increase debt costs and push distressed debt deeper into a hole.

“What hasn't really happened is a rapid, mass unwinding of these positions,” Biasi said. “Until someone's hand is really forced, which there just frankly hasn't been, this is kind of how it's going to go.”