Two years after regional banking volatility rocked the sector, banks are quietly offloading problematic commercial real estate loans originated during the low-rate boom—clearing the decks and tightening the reins.

Portfolio cleanup underway: Regional banks are actively working out and writing down underperforming loans—especially those inked during the ultra-low interest rate cycle. Trepp data shows this is helping stave off the broader distress many expected to hit in 2024.

Charge-offs climbing, not delinquencies: CRE loan delinquencies dipped to 1.99% in Q4 2024—marking the first quarterly decline since 2022. But net charge-offs ticked up 20 bps, driven largely by $1B in office loan write-downs that were proactively marked down before hitting default. Meanwhile, watchlists are still growing, as more assets are flagged internally as “criticized.”

Originations improving—but still tight: New CRE loan volume from banks hit $5.6B in Q4, making it three straight quarters of growth. Still, that’s just 41% of the pre-COVID average. Banks remain selective, facing tighter regulatory oversight and competition from private credit.

Backlash from the 2022 surge: In H1 2022 alone, banks pumped $316B into CRE—only to sharply pull back as rates spiked. That slowdown in originations is ironically helping today, as fewer over-leveraged loans are surfacing in distress stats.

Refi hurdles ahead: Loans underwritten just as rates started climbing are now hitting maturity—and facing headwinds. A 1.5x DSCR is quietly becoming a trigger point for concern. The good news: most bank loans are still performing above that threshold thanks to more conservative underwriting.

➥ TAKEAWAY FOR BROKERS & BANKERS

New money talks: As short-term extensions give way to real refis, banks want borrowers to re-engage—with fresh capital. Rollovers aren’t automatic anymore. Lenders are signaling loud and clear: they want borrowers who have skin in the game, not just a handshake and hope.