Where Is the Distress in Commercial Real Estate? Look to the Banks
September 3, 2025
What to Know:
- Distress is concentrated in the banks, not just with borrowers.
- Multifamily debt is a key pressure point in the market.
- Investor opportunity depends on bank strategy. Investors should take a wait and see approach. There could be opportunities for investors who are ready, connected, and have cash on hand.
In today’s commercial real estate market, the question isn’t whether distress exists, it’s where it’s hiding. The headlines have focused on office vacancies, retail bankruptcies (one of the most recent being mall staple Claire’s), and high interest rates. But the most significant concentration of distress is building quietly on the balance sheets of banks.
Banks hold roughly 60% of all CRE loans in the U.S., and $2 trillion in debt will be coming due within the next two years. Regional banks are especially vulnerable, particularly in office properties, where the special servicing rate has hit a 25-year high.
In the last cycle, much of this distress would have surfaced first in public REITs or private debt funds, where workouts and sales are part of the business model. Today, it’s sitting in financial institutions that excel at originating loans, not operating real estate. That distinction is critical
From CLOs to Bank Books
The epicenter of current delinquency risk is the multifamily sector. Multifamily net losses peaked at $767 million in Q1 2025, the highest quarterly total since 2012.
Between 2020 and 2022, billions in multifamily development and lease-up deals were financed through CRE collateralized loan obligations (CRE CLOs). CLOs became the go-to financing vehicle for transitional properties because they allowed lenders to bundle floating-rate loans and sell them to investors hungry for yield.
But when rates surged in 2023, debt costs spiked, and exit refinances became much harder to execute. Valuations fell in some markets, and cap rates expanded.
As refinancing windows closed and market liquidity tightened, many loans financed through CRE CLOs faced mounting pressure. Rather than seamlessly rolling into new securitizations or permanent financing, these assets increasingly found themselves funded through warehouse facilities, short-term lending arrangements often provided by banks.
Some lenders are tapping these warehouse lines to finance the buyout of defaulted CLO loans, underscoring that these facilities, which were never intended as long-term repositories, are now holding a growing share of distressed multifamily debt.
Community Banks and Multifamily Loans
It’s not just big-name developers feeling pressure. Community and regional banks are perhaps more at risk of loan delinquencies. U.S. multifamily loans held by community banks are seeing a significant uptick in delinquency and realized losses, according to CRE Daily.
Over $6.1 billion in multifamily loans are now delinquent within a $629.7 billion portfolio – translating to a 0.97% delinquency rate, while realized losses have climbed to $504 million, the highest since 2013.
The Bank’s Distress Playbook
Once a troubled loan is in a bank’s hands, there are three main ways forward:
- Sell the Note – Move the debt to an investor, usually at a discount. This frees up the bank’s balance sheet but can require accepting a steep write-down. In today’s market, discount levels can be substantial because distressed debt buyers expect double-digit returns.
- Take Over and Operate the Asset – Step into ownership and management, invest fresh capital, and stabilize the property until conditions improve. While this can preserve long-term value, it can tie up resources for years.
- Bring in a Capital Partner – Install a new general partner/operator with fresh equity who can turn the asset around. The bank remains in the capital stack, but operational risk shifts to the sponsor. This structure is increasingly appealing because it blends downside protection with upside participation.
Why This Matters for CRE Investors
How banks choose to deal with the growing pile of troubled real estate loans will shape the commercial property market over the next year. If banks take their time, working out deals quietly with borrowers, sales will stay slow and it will take longer to figure out what properties are really worth. But if banks start selling off these loans in large numbers, property prices could drop more sharply, creating challenges for some owners, but also opening the door for investors looking for bargains.
For now, banks are holding and assessing behind closed doors. That means the media is largely covering the distress in the market that is visible – retail bankruptcies, foreclosures, and empty office buildings. But this is only a fraction of the actual stress building in the system.
For investors, this is the time to prepare. That means building relationships with lenders and special servicers, raising capital so you can move quickly when opportunities surface, and developing underwriting models that account for both higher debt costs and the potential for operational turnaround. When banks do start to move, the best deals will likely go to buyers who are already known, trusted, and ready to transact.
The Bottom Line
Distress isn’t just a borrower problem – it’s a bank problem. With more than half of CRE lending exposure sitting in banks, the way they choose to handle troubled assets will set the tone for the next market reset. For investors, that means paying close attention to bank moves. When they start selling or restructuring in earnest, it could open the door to some of the best buying opportunities of the cycle.
About Jack Mullen of Summer Street Advisors:
As Founder & Managing Director of Summer Street Advisors, Jack Mullen leverages decades of experience in valuation, underwriting, and risk management to lead multi-million and multi-billion dollar CRE transactions.
Previously with GE Capital and large institutional banks, he has shaped investment strategies for some of the industry’s largest deals. A recognized leader, his insights are featured in GlobeSt.com and CREFC Finance World, and he is a sought-after speaker at industry conferences and top universities.
For strategic advice on your portfolio or transaction, contact:
jack.mullen@summerstreetre.com
Media Contact:
Insight
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