Many banks are still burdened with potentially troubled real estate loans, data shows, but the picture is improving. Still, economic uncertainty is raising new questions for both lenders and borrowers. iStock illustration

Delinquent loans are ticking down, but the volume of charged-off loans is rising and economic uncertainty tied to the Trump administration’s policies has made at least some banks and borrowers hit “pause.”

Welcome to the 2025 commercial real estate lending market.

In the fourth quarter of 2024, bank-originated commercial real estate loan delinquencies began to slightly decrease quarter-over-quarter, for the first time since 2022 according to data firm Trepp. The overall delinquency rate ticked down to 1.99 percent in the fourth quarter from 2.04 percent in the third quarter. Trepp also noted that office delinquencies decreased.

“Seeing a slight decrease in loan delinquencies is a promising sign,” said Aaron Jodka, director of U.S. capital markets research at commercial brokerage Colliers. “If the banks can become larger drivers of new originations and continued activity, that bodes more favorably for the commercial real estate industry as a whole.”

While some banks have pulled back in their commercial real estate lending, Jodka said, this type of financial institution continues to be largest provider of commercial real estate debt in the country. In the fourth quarter of 2024 originations in Massachusetts totaled approximately $317 million according to Trepp.

“From a lending standpoint, some banks are facing some challenges when it comes to their concentration of commercial real estate loans,” he said. “In some cases, the loans aren’t paying off as they used to.”

Instead, loans are going to maturity and thanks to troubled office markets and some of the highest interest rates in years, banks’ borrowers are finding it difficult to refinance.

“So that’s why we’ve seen those delinquency rates increase,” he said. “We’ve seen CMBS delinquencies increase, and that’s indicative of the higher interest-rate environment that we found ourselves in after a decade-plus of very accommodative interest rate policy from the Federal Reserve.”

But Trepp’s fourth quarter data also showed that the net balance of charged-off bank CRE office loans continued to increase across the country, by 20 basis points in the fourth quarter. Quarterly net charge-offs tied to office properties alone surged to over $1 billion for the fourth quarter, or 3 percent of all office loans.

For the financial institutions holding those loans, that’s money they’re never getting back, and can’t plow back into new loans.

Local banks’ first-quarter earnings calls show a small amount of that increase can be attributed to Boston commercial properties.

Rockland Trust executives told Wall Street analysts last week the bank saw net charge-offs increase to $40.9 million in the fourth quarter of last year, compared to $1.2 million in the prior quarter. This was primarily due to three previously classified commercial loans, two of which had been reserved for in prior periods, executives said.

Not Just Troubled Office Loans

While the office sector in particular has dealt with challenges for years, the broader economy has now been plunged into uncertainty. The White House’s economic policies have created volatility in the stock, bond and currency markets, and pushed many companies into holding patterns.

With more economic uncertainty, Jodka said, some pullback or lending pauses should be expected from banks.

“We would expect in the near term some additional caution as it pertains to real estate activity, whether that’s lending, whether that’s acquisitions, dispositions, etc., due to the uncertainty that’s in the marketplace,” he said. “How that ultimately plays out is still to be determined in terms of policy and timing and overall impact but in the short term, we would expect a bit of a pause, in some cases, as market participants get their bearings.”

Some borrowers, too, are hitting “pause,” said Erik Porter, CFO of The Cooperative Bank of Cape Cod.

“The market thinks that the [interest] rates are going to decline. The Fed is not promising anything, and saying that it remains to be seen, depending on what economic indicators you know present themselves over the next few months,” he said. “So I think that level of uncertainty is going to give some industries a little bit of pause, and they don’t want to get into a project that might result in either increased costs as a result of tariffs – for example, if they’re relying on steel or things of that nature – and all of a sudden they may not have the budget contingencies in their project to overcome some of the elevated costs.”

BankHometown President and CEO Robert J. Morton said his bank has already pulled back on its CRE lending – and it could continue that posture due to economic uncertainty. After making $300 million in total commercial loans three years ago, he said bankHometown is targeting just $100 million for 2025.

“We kind of filled that bucket up so now we’re trying to diversify in owner-occupied real estate and C&I lending,” he said.

Sam Minton

Owner-Operators a Draw

BankHometown is focusing on these two sectors because it doesn’t have to rely on third-party tenants to make a loan viable, Morton said. Instead, the bank’s underwriters can focus on the cash flow of the operating company.

“If you do it right, there’s also the opportunity to grow material deposits,” he said. “So there’s a double benefit from that, because when you do non-owner-occupied CRE it’s very tough to get any meaningful deposits from that transaction. So, the C&I and the owner- occupied helps both sides of the balance sheet, not just the asset side, loan growth, but also the liability side and deposit growth.”

While economic uncertainty can cause some concern, Porter said that the Cooperative Bank of Cape Cod nonetheless expects to boost its yearly volume of commercial real estate lending this year.

“We have a commitment locally to our community. We have a pretty decent-sized portfolio of hotels and motels and things of that nature. Given tourism is such a big part of our industry and it remains to be seen what happens this summer” with foreign travel down significantly, he said. But “we’ve been through some pretty tough times in the last five years and we did very well from a performance standpoint. If we did have borrowers that that we needed to work with, that’s what we do as a community bank – work with our borrowers, work with our community – and it’s that partnership that really, I would say, sets us apart from some of the big guys.”