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Banks Shake Off CRE Fears as Outlook Brightens
After years of turbulence, banks with significant commercial real estate (CRE) exposure are showing signs of stability, according to a new S&P Global Ratings report.
Jordan B.
February 24, 2025
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Good morning. After years of uncertainty, banks with high commercial real estate exposure are showing signs of stability, with S&P upgrading several regional banks once seen as vulnerable.
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Market Snapshot
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BANKING REPORT
Banks Shake Off CRE Jitters as Outlook Improves
S&P Global Ratings says that while CRE risks haven’t disappeared, banks are in a much stronger position than they were a year ago.
Signs of stabilizing: While CRE loan issues will continue to impact U.S. banks, S&P Global Ratings has revised its outlook on six banks from negative to stable, signaling improved confidence. The firm reports that 90% of the banks it rates are prepared for CRE-related headwinds, expecting a return on equity between 10.5% and 11.5% in 2025.
Supporting stability: S&P identified six factors contributing to banks’ resilience.
Economic Strength: U.S. GDP is expected to grow 2% over the next two years, with unemployment stabilizing at 4.2%.
CRE Valuations Holding Steady: Office property values, the sector’s biggest concern, have fallen 36% since 2022 but only 1% in 2024, suggesting stabilization. Multifamily, industrial, and retail valuations improved last year.
Reduced Office Loan Exposure: Larger banks hold only 11% of their portfolios in non-owner-occupied CRE, while rated banks have 19% exposure. Office loans make up a low-single-digit percentage of all loans.
Improved Asset Quality: Past-due and nonaccrual CRE loans rose slightly to 1.7% in 2024, and bank CRE charge-offs were 1.9% over the past two years.
Stronger Bank Balance Sheets: Deposits rebounded from $18.3 trillion in 2023 to over $19 trillion in 2024, while unrealized losses on bank securities dropped from $685 billion to $485 billion.
Continued Profitability: S&P projects an industry-wide return on equity of 10.5% to 11.5% for 2025, maintaining a solid earnings outlook.
➥ THE TAKEAWAY
What’s next? Despite positive trends, banks still face challenges. Inflationary pressures and delayed Federal Reserve rate cuts could impact economic conditions. Additionally, $4.5 trillion in CRE loans, including those outside the banking sector, require refinancing by 2028, posing a long-term risk.
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✍️ Editor’s Picks
Economic momentum: Fannie Mae’s latest outlook sees the U.S. economy entering 2025 with strength, though policy uncertainty and rising inflation forecasts could pose risks ahead.
Apple’s big bet: Apple is committing $500 billion to U.S. investments over the next four years, including a new manufacturing facility, expanded AI-driven server production in Texas, and 20,000 new jobs.
Leasing surge: Empire State Realty Trust closed 2024 with 1.3 MSF in office and retail leases—its highest since 2019—and is carrying strong momentum into 2025.
Rate cut outlook: Atlanta Fed President Raphael Bostic expects two interest rate cuts in 2025 but warns that uncertainty, particularly around policy shifts, could impact that forecast.
Investor rebound: CBRE's $146B asset management arm says investors are re-entering the market in 2025, with a focus on Sun Belt cities, niche housing, and infrastructure, while traditional office remains a challenge.
🏘️ MULTIFAMILY
Raising rents: With multifamily construction falling, REITs are optimistic about rent growth in 2025, particularly in coastal markets with low supply.
Ready to deploy: Middle Street Partners has completed a $69M recapitalization, positioning itself for $1B in multifamily developments and acquisitions.
Conversion: The former U.S. Department of Homeland Security headquarters in D.C. is being converted into apartments, with units expected to be available by spring 2026.
D.C. exit: After decades in Washington, D.C., Lustine Realty sold its final property, citing tenant-friendly laws and a challenging sales process as reasons for leaving the market permanently.
Student sales surge: Student housing transactions picked up in 2024, with top universities like South Carolina, Arizona, and Penn State leading in deal volume amid rising rents and strong preleasing activity.
🏭 Industrial
Terminal sales: Bankrupt trucking company Yellow has secured buyers for two more terminals in Colorado and Washington as it continues liquidating assets.
Microsoft rethinks AI: Microsoft is canceling U.S. data center leases and slowing international expansion, raising questions about whether AI infrastructure spending is outpacing long-term demand.
Biotech boom: Vallejo/Fairfield topped CBRE’s net-lease investment rankings after Swiss drugmaker Lonza acquired Genentech’s Vacaville biopharmaceutical campus for $1.2 billion.
🏬 RETAIL
Optimism: A strong Q4 leasing surge fueled optimism for retail REITs, with record occupancy and rising rents despite some industry headwinds.
Talking retail: Stephen Yalof, Tanger CEO, joins ‘Fast Money’ to talk quarterly results, consumer trends, shifting locations, and more.
🏢 OFFICE
Pension: The State Teachers Retirement System of Ohio listed 590 Madison Ave for $1.1B, one of the largest Manhattan office sales since the pandemic.
Sell-Off: Hudson Pacific Properties plans to sell up to $150 million in assets to counter losses from struggling office and studio occupancy while eyeing a potential boost from expanded film tax credits.
Cut it back: The Department of Government Efficiency (DOGE) has terminated 2.3 MSF of federal office leases, saving $145M in RE costs.
Recap: RFR secured a $160 million recapitalization for 475 Fifth Avenue, stabilizing the Midtown office tower after facing potential foreclosure from JPMorgan Chase and Citibank.
🏨 HOSPITALITY
Revamp: Park Hotels & Resorts plans to sell up to $400 million in non-core assets while investing $330 million in renovations, including a $100 million overhaul of the Royal Palm South Beach Miami.
📈 CHART OF THE DAY
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