According to S&P Global Ratings, while commercial real estate (CRE) risks persist, banks are in a significantly stronger position than they were a year ago.

Signs of Stability

CRE loan challenges continue to affect U.S. banks, but S&P Global Ratings has upgraded its outlook on six banks from negative to stable, reflecting increased confidence. The agency notes that 90% of rated banks are prepared for CRE-related pressures, with projected returns on equity between 10.5% and 11.5% in 2025.

Factors Supporting Bank Resilience

S&P highlighted six key factors contributing to banks’ improved standing:

1. Economic Growth – The U.S. GDP is expected to expand by 2% over the next two years, with unemployment holding steady at 4.2%.
2. CRE Valuations Stabilizing – Office property values, a primary concern, have dropped 36% since 2022 but saw only a 1% decline in 2024. Meanwhile, multifamily, industrial, and retail valuations improved last year.
3. Lower Office Loan Exposure – Larger banks allocate just 11% of their portfolios to non-owner-occupied CRE, while rated banks hold 19%. Office loans represent only a small fraction of total lending.
4. Better Asset Quality – Delinquent and nonaccrual CRE loans inched up to 1.7% in 2024, while CRE charge-offs averaged 1.9% over the past two years.
5. Stronger Balance Sheets – Bank deposits rebounded from $18.3 trillion in 2023 to over $19 trillion in 2024, and unrealized losses on bank securities decreased from $685 billion to $485 billion.
6. Sustained Profitability – S&P anticipates an industry-wide return on equity between 10.5% and 11.5% in 2025, maintaining a positive earnings trajectory.

The Road Ahead

Despite these encouraging signs, challenges remain. Inflationary pressures and potential delays in Federal Reserve rate cuts could impact the broader economy. Additionally, $4.5 trillion in CRE loans—both within and outside the banking sector—are set to mature by 2028, presenting a long-term refinancing challenge.