- Regional banks remain vulnerable due to exposure to distressed CRE debt, particularly in office properties, where the special servicing rate has hit a 25-year high.
- A recession risk looms as the Fed signals continued economic uncertainty and CMBS delinquencies rise.
- Private lenders and debt funds are filling the gap, capitalizing on banks’ retreat from CRE lending, though concerns over shadow banking risks are growing.
Lessons From the 2023 Banking Crisis
Two years ago, the U.S. witnessed the second-, third-, and fourth-largest commercial bank failures in history, as Silicon Valley Bank, Signature Bank, and First Republic collapsed under a mix of deposit runs and rising interest rates. According to Commercial Observer, the government stepped in to stabilize the financial system, but concerns remain about whether another wave of regional bank failures could be on the horizon.
The primary driver of risk today? Distressed CRE debt. Rising vacancies, high interest rates, and declining property values have put billions in real estate loans underwater, especially in the struggling office sector.
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CRE Debt and the Regional Bank Dilemma
According to the Mortgage Bankers Association, a record $957B in CRE debt is set to mature in 2025. Many regional banks—heavily exposed to office loans—are engaging in “extend and pretend” strategies, delaying reckoning with losses.
By the numbers:
- Office special servicing rates: 16.19% (a 25-year high)
- Overall CMBS special servicing rates: Jumped from 7.14% in February 2024 to 10.32% in February 2025
- Uninsured bank deposits: Now makeup 40% of all commercial deposits, increasing liquidity risks
Some experts, like Chad Carpenter, CEO of Reven Capital, predict a “hard-landing recession” if banks are forced to recognize their losses. Others argue that regulatory rollbacks under the Trump administration could allow struggling banks to merge, avoiding systemic collapse.
The Rise of Private Lenders in CRE
Private debt funds and alternative lenders are stepping in as traditional banks withdraw from CRE lending. Firms like Ares Management, Apollo Global Capital, and Northwind Group are deploying capital at higher rates than banks and taking on deals that would have previously been handled by traditional lenders.
Private credit by the numbers:
- $1.8T has been raised by private credit firms
- Expected to double to $4.5T by 2030
- Offers higher-yield alternatives to bank loans, albeit at greater risk
While some see these lenders as a solution, others, like Cornell Law professor Robert Hockett, warn that “shadow banking” risks are growing, echoing the opaque financial structures that contributed to the 2008 crisis.
What’s Next?
The fate of regional banks hinges on how they navigate CRE debt maturities, interest rate movements, and regulatory shifts. Another crisis could unfold if banks can’t offload bad loans fast enough. However, private lenders are poised to seize more market share—potentially reshaping CRE finance for good.
As alternative lenders grow and traditional banks retreat, some experts believe the U.S. banking system could be at an inflection point. Could banks become obsolete in the face of digital finance and decentralized lending? That remains to be seen.
