Commercial real estate loans account for 28.7% of assets at small banks, compared with just 6.5% at bigger lenders, according to JPMorgan

Commercial real estate loans account for 28.7% of assets at small banks, compared with just 6.5% at bigger lenders, according to JPMorgan,.

In 2025, more than half of the total property debt coming due over that period, according to commercial real estate data provider Trepp. Regional lenders, in particular, are more exposed to the industry and stand to be hit harder than their larger peers because they lack the large credit card portfolios or investment-banking businesses that can insulate them.

The KBW Regional Banking Index experienced a 6% decline on Wednesday, marking its worst performance since the collapse of Silicon Valley Bank last March. The gauge dropped an additional 3.2% Thursday.

Commercial real estate loans make up 28.7% of assets at small banks, compared with just 6.5% at bigger lenders, as per a JPMorgan Chase & Co. report published in April. This exposure has prompted additional scrutiny from regulators, already on high alert following last year’s regional banking tumult.

“It’s clear that the link between commercial property and regional banks is a tail risk for 2024, and if any cracks emerge, they could be in the commercial, housing, and bank sector,” Justin Onuekwusi, chief investment officer at wealth manager St. James’s Place, remarked.

While real estate troubles, particularly for offices, have been apparent in the nearly four years since the pandemic, the property market has, in some ways, been in limbo: Transactions have plunged due to uncertainty among both buyers and sellers over building valuations. Now, the need to address looming debt maturities — and the prospect of Federal Reserve interest-rate cuts — are expected to spark more deals that will bring clarity to just how much values have fallen.

Those declines could be stark. The Aon Center, the third-tallest office tower in Los Angeles, recently sold for $147.8 million, about 45% less than its previous purchase price in 2014.

“Banks — community banks, regional banks — have been really slow to mark things to market because they didn’t have to; they were holding them to maturity,” said Bordwin. “They are playing games with what is the real value of these assets.”

So far this year, earnings at many regional lenders have shown little sign of stress, with Fifth Third Bancorp, for example, noting it experienced zero net charge-offs in commercial real estate in 2023.

But exacerbating the nervousness surrounding smaller lenders is the unpredictability of when and where soured real estate loans can occur, with just a few defaults having the potential to wreak havoc. New York Community Bancorp said its increase in charge-offs were related to a co-op building and an office property.

While offices are a particular area of concern for real estate investors, the company’s largest real estate exposure comes from multifamily buildings, with the bank carrying about $37 billion in apartment loans. Nearly half of those loans are backed by rent-regulated buildings, making them vulnerable to New York state regulations passed in 2019 that strictly limit landlords’ ability to raise rents.

At the end of last year, the Federal Deposit Insurance Corp. took a 39% discount when it sold about $15 billion in loans backed by rent-regulated buildings. In another indication of the challenges facing these buildings, roughly 4.9% of New York City rent-stabilized buildings with securitized loans were in delinquency as of December, triple the rate for other apartment buildings, according to a Trepp analysis based on when the properties were built.