Lenders nation-wide are sitting on a record amount of liquidity, largely built up to guard against distress over the last five years. At some point, it will have to be put to work. iStock illustration
Their numbers of troubled commercial real estate loans are falling. They’ve been building up cash reserves for three years to hedge against market problems. Local bankers say they’re in a much stronger position to deal with risk in their commercial real estate loan portfolios.
But will that give some the confidence to wade back into the commercial real estate market?
A recent report from S&P Global found that office valuations have stabilized and that, industry-wide, banks’ CRE concentration is relatively small. The report noted that a blend of all commercial property prices is down 18 percent from its 2022 peak but in 2024, CRE prices increased by about 5 percent.
After posting sharp price declines of roughly 36 percent since the peak in 2022, nationwide office real estate prices have more or less stabilized in 2024, S&P reported, down only 1 percent over 2023.
“Banks are very well capitalized, but also the issues that are in the commercial real estate market, which are primarily office-driven, as you know, they are playing out over a very extended period of time, because the inflection point on these office loans is when a lease expires or when the loan matures,” said Eastern Bank executive vice president, chief credit officer Matthew Osborne.
He added that the fact that the issues in commercial real estate aren’t as instant allows banks to be more methodical when sorting out troubled commercial loans.
While the greater certainty in their real estate loan portfolios might make banks willing to take on more loans, but only up to a point.
“Are we willing to take more risk? I don’t think we were willing to take more risk five years ago or 10 years ago. But I do think the reason the non-bank lenders might be growing is they might be taking on a little bit more risk and also getting rewarded for it in a premium on the interest,” said South Shore Bank chief commercial lending officer Stephen DiPrete. “I think if we were going to relax standards then I think we’d have to reconsider our pricing model. Typically, the banks in the capital stack are the most attractively priced. You price your risk. Usually we’re the lowest-risk so until that changes in our industry, I think risk is always going to be a big factor in our decision making.”
Preparation Paying Off
With office real estate prices – the most troubled asset class out there – now stable, banks are seeing less distress on their books.
S&P reported that M&T Bank, a major presence in the CRE lending scene in the Northeast, has seen its percentage of nonaccrual, modified or past-due CRE loans dropped to 5.5 percent in the fourth quarter of 2024, a decrease of 330 basis points from 2023.
Risks in CRE can be managed by building up reserves and capital. And banks have been chasing this goal with purpose in recent years as they stared down trouble in their office loan portfolios and turmoil following the Silicon Valley Bank and First Republic Bank failures.
In January of 2019, depository institutions in the United States had $1.71 trillion in reserves according to the Federal Reserve Bank of St. Louis. In January 2025, their collective reserves hit $3.25 trillion, an increase of 90 percent.
“I think banks have reserved well,” said DiPrete. “I think they definitely want to make sure they can deploy their assets, which is their capital, and make money, and when it’s in reserves, it’s not making anything. So, you will see, naturally, a return to lending as the primary source of revenue.”
CRE Presence Growing
There are signs that banks have indeed returned to CRE lending.
Banks were the biggest non-agency lenders in the fourth quarter, according to CBRE, accounting for 43 percent of loan closings, followed by life companies (33 percent) and alternative lenders (23 percent). Banks’ share is up from 18 percent in the prior quarter and 40 percent year-over-year.
Locally, banks made $20.39 billion in commercial mortgage loans of all types in Massachusetts 2024 according to The Warren Group, publisher of Banker & Tradesman. Credit unions made $556.92 million in commercial real estate loans.
Meanwhile mortgage companies and other non-bank lenders like insurance companies made commercial loans amounting to $12.61 billion in Massachusetts in 2024.
Additionally, while Citi Bank was the top commercial real estate lender in Massachusetts in terms of volume, local and regional Massachusetts banks were among the top commercial real estate lenders in Massachusetts according to data from The Warren Group. They were followed by Rockland Trust. Also in regards to total number of loans in 2024, local banks made up the top four with Rockland Trust amassing 108 purchase mortgage loans.
Sam Minton
Factors Holding Banks Back
Reserves might be at all-time highs, but high interest rates are still holding banks back. And community banks are still heavily exposed to commercial real estate, an area bank regulators have flagged for concern in recent years.
“But there’s no question, the balance sheet freedom that we had a couple years back to do these deals has been much more influenced by liquidity and capital,” said Robert Carey, The Cooperative Bank of Cape Cod’s commercial banking market leader. “Our capital levels are higher. There’s just not room to support a piece of growth that we could get, that we could do, given the amount of interest out there in these types of deals. So that’s been where the constraint has been for us: less risk than it is actual liquidity and asset liability management.”
S&P’s report noted that for banks with less than $10 billion in assets, commercial real estate loans made up roughly 38 percent of their balance sheet.
Along with focusing on not being focused on one market sector, Carey added that The Cooperative Bank of Cape Cod is also focused on diversifying who it lends to in order to mitigate risk.
“We’re managing the concentration on our books,” he said. “We’re managing the overall exposure to any individual investor or borrower. That’s really how we’ve been looking at it.”
