Banks Are Poised for a Commercial Real Estate Lending Rebound in 2025

One of the big unknowns confronting the commercial real estate debt markets in late 2024 is whether banks will show signs of increased activity again after a lengthy period of relative inactivity — especially since interest rates are trending downward.

The uncertainty of what bank lending levels will look like in 2025 comes as the U.S. has nearly $6 trillion in CRE mortgage debt outstanding, according to a recent Moody’s Ratings report that cited data from the Federal Reserve. While banks have largely been on the sideline since the Fed started raising interest rates in early 2022, these institutions still hold by far the largest share of current CRE loans at 50.8 percent, with government-sponsored enterprises in second place at 17.2 percent, according to Moody’s. 

Al Brooks, head of commercial real estate at J.P. Morgan Chase, said CRE balance sheet lending is expected to pick up at the firm and across other large banks in 2025 from the low levels of the past few years. 

“Across the industry, we are starting to see a slow ramp toward normalization,” Brooks said. “Fundamentals remain strong in areas like multifamily, and there are certainly sectors like office where it will take some time to understand the new demand.”

Balance sheet lending by the largest banks went largely on the back burner after the Federal Reserve under Chairman Jerome Powell began aggressively hiking interest rates in early 2022 in an effort to combat inflation. The Fed brought the benchmark borrowing rate to its highest level in more than two decades with 11 hikes in 12 meetings between March 2022 and July 2023, then held it there for eight straight meetings before a 50 basis point cut in September to between 4.75 percent and 5 percent. 

Powell said after the central bank’s Sept. 18 meeting the median projection of Fed members estimates that the “appropriate” short-term interest rate will be 4.4 percent at the end of this year and 3.4 percent at the close of 2025 if “the economy evolves as expected.” Many market analysts are anticipating a quarter-point cut at the Fed’s next meeting on Nov. 7. 

Stephen Lynch, vice president and senior credit officer at Moody’s, noted that while banks still hold a large chunk of CRE loans, a recent survey of senior loan officers did show a tightening for many successive quarters. He said what could be behind the disconnect is banks renewing the loans with paydowns as sponsors contribute more equity or tighten their covenants.

“The standards have been getting tighter and tighter, but it is almost like the Titanic, where it takes a while to move a big ship into another direction,” Lynch said. “Even when banks turn off the faucet, it is still going to continue to grow since they have outstanding commitments out there. So the full balance hasn’t been drawn and there’s delayed drawing on those loans, or there is a lot of construction loans that are going to convert into permanent NOI-type properties.” 

Even though a number of CRE loans with looming maturities, especially in the office sector, are facing distress amid refinancing difficulties, some of the larger deals financed by banks could still be positioned for fresh capital. 

A Moody’s 2024 CRE bank survey of 60 banks showed that their largest loans have featured the most conservative underwriting standards with an average loan-to-value ratio in the 50 to 60 percent range. Debt yields for these largest loans originated by banks averaged in the high single digits, which Moody’s said indicates that most of these underlying properties can carry current market mortgage rates of around 7 percent.

The median percentage of bank-held CRE loan modifications more than doubled in the first half of 2024 compared with the same time in 2023, according to Moody’s, likely driven in part by hopes of the market receiving interest rate relief later in the year. The highest concentration of modifications derived from banks with assets of $100 billion to $700 billion, while ones with less than $100 billion had the fewest, according to Moody’s. 

Laura Swihart, a partner at law firm Dechert, said a big reason banks remain largely inactive stems from having a number of seasoned loans on their books issued when interest rates were far lower. She said the Fed would need to bring down rates much more to make those older loans easier to refinance, and until that happens alternative lenders will be the bigger force in the debt markets.

“We are seeing more nonbank lenders doing more loans right now, and I think part of the reason that’s happening is because they don’t have as many seasoned loans and they actually use the capital markets to not keep the loans on their portfolio as much,” said Swihart, who co-chairs Dechert’s global finance and real estate practice groups.

Swihart noted that anticipated drops in long-term interest rates that had been priced into deals after the Fed’s September meeting went away when they didn’t fall as expected, despite the 50 basis point cut in the benchmark rate. She said bank lenders she represents have largely focused on large loans for “marquee properties” in the commercial mortgage-backed securities (CMBS) market that they can quickly get off their books. 

An increase in CMBS volume this year has been driven partly by banks’ unwillingness to increase their balance sheet CRE lending, according to Swihart. Private label CMBS issuance totaled $42.29 billion in the first half of 2024, nearly three times the volume seen during the same period in 2023, Trepp data shows. 

Regional banks filled much of the lending void left by the large banks in 2022, before largely scaling back last year as the collapses of Silicon Valley Bank and Signature Bank prompted concerns about contagion. 

“I think that the regional banks are well capitalized much more so now than at any time in my career and, frankly, the valuations of CRE are very attractive for new interests coming in and wanting to take on a project,” said Eric Newell, chief financial officer at Bethesda, Md.-based EagleBank. “There’s a lot of capital that’s out there looking for deals on CRE, and there’s a fair amount of financial institutions that are actually selling CRE loans. Depending on who’s buying or how that’s being dispositioned there could be a financing opportunity on the other side of that valuation for that new buyer that’s much more attractive than whoever was selling it.” 

Newell estimates there are around $400 million in CRE projects from bridge loans seeking permanent financing on EagleBank’s balance sheet, a number he said is likely similar at other regional banks. He said that while EagleBank is more focused on originating in the commercial and industrial (C&I) lending space than CRE, other regional banks may opt to target these loans if interest rates drop further next year.

Moody’s Lynch said the smaller banks that experienced the greatest level of CRE growth in 2021 and 2022, before interest rates began soaring, are going to be far more conservative on the lending front for commercial properties next year. He noted, though, that larger banks not as heavily concentrated in CRE may be more willing to increase their exposure.

“They have a less diversified business model so they’re also going to have to put dollars to work, and they don’t have as many chemicals or outlets that a bigger bank does,” Lynch said. “They are going to be in a tougher place.”

Warren Kornfeld, senior vice president of the financial institutions group at Moody’s, said C&I is the type of lending that offers regional banks the greatest opportunities for growth as an alternative to CRE. That’s because the smaller banking institutions have more challenges tackling business lines like credit cards and automobile loans. 

“The most natural market for them to expand into is C&I, but it’s a very competitive market share,” Kornfeld said. “The other thing with C&I lending is frequently it’s not just about lending, and it’s about providing treasury management types of services, which these smaller, midsize regionals might not be super strong at. So it takes time to build that business, but I do think that’s where they will try to go and migrate.”