Written by: Bhavna Goyal, Senior Director of Credit Risk Management and Zachary Halpern, Managing Director, Head of Portfolio Management and Capital Markets, REIS
Rising non-current commercial real estate loans are rippling through bank balance sheets across the country, and the damage is neither isolated nor fleeting. Instead, recent data show a lagged but broad-based credit cycle unfolding across construction, commercial and multifamily portfolios, with the timing and intensity of stress varying sharply by geography.
Tracing a Lagged CRE Credit Cycle
Following a prolonged period of historically low interest rates and rapid CRE price appreciation, the U.S. banking system entered a sharply different operating environment beginning in 2022. Initial market attention focused on liquidity and funding pressures, but regulatory and bank-reported data now show a persistent increase in noncurrent CRE loans—those 90 or more days past due or on nonaccrual status.
The delayed emergence of credit stress reflects the long duration, contractual rigidity and refinancing-driven nature of real estate lending. By examining peer-group trends by geography and asset type, this analysis seeks to explain why non-current loan ratios are rising now and why the pattern of deterioration differs across CRE portfolios.
Using peer-group trend data published by the Federal Deposit Insurance Corporation (FDIC) and segmented by geography and asset type, the analysis tracks the evolution of non-current loan ratios across construction, commercial and multifamily portfolios.
For geographic analysis, it applies the FDIC’s regional classifications of Atlanta, Chicago, Kansas City, Dallas, San Francisco and New York. Across these regions, total CRE loan balances—which include construction, commercial and multifamily loans—have generally remained stable or increased, even as the share of non-current loans has risen. That pattern indicates the rise in non-current loan percentages is not simply a denominator effect, but a reflection of genuine credit deterioration.
Construction Loans: The Leading Edge of Stress
Across nearly all geographies, construction loans show the earliest and sharpest increase in non-current ratios. Trends remain relatively flat through 2022, followed by a pronounced inflection beginning in late 2023 and accelerating through 2024 and 2025. This pattern reflects the inherent sensitivity of construction lending to interest rates, costs and exit liquidity. Projects originated in the low-rate period now face higher carrying costs, delayed stabilization timelines and refinancing risk as permanent financing becomes more expensive and more selective.
At the same time, cost inflation in labor, materials and insurance has eroded borrower equity cushions, leaving limited margin for error. Notably, non-current construction ratios continue to rise even as construction loan balances have stabilized in many markets. This divergence points to true credit deterioration rather than denominator effects and positions construction portfolios as a leading indicator for broader CRE stress.
Structural Weakness, Especially in Office
Commercial real estate loans show a slower but more persistent increase in non-current ratios than construction loans. Large metropolitan markets with significant central business district exposure consistently register higher non-current levels and sustained upward trends. Unlike construction loans, the deterioration in commercial CRE appears less cyclical and more structural. In the authors’ view, remote and hybrid work has weighed on office demand in many markets, contributing to weaker cash flows, declining valuations and widening refinancing gaps.
As capitalization rates adjust more rapidly than net operating income, loan-to-value ratios increase mechanically, elevating the risk of covenant breaches and maturity defaults. The absence of meaningful reversals in noncurrent ratios suggests that these pressures are continuing to work their way through bank portfolios. FDIC peer-group data for commercial loan balances and non-current percentage trends by geography underscore the persistence of this stress across markets.
Multifamily: A Delayed but Accelerating Adjustment
Multifamily loans display the most delayed response to macroeconomic tightening, with non-current ratios remaining relatively stable through early 2023. A noticeable inflection begins in mid2024, with the slope steepening further by 2025. This lagged response partially reflects government rental assistance programs during COVID, which supported rent growth and occupancy and temporarily masked underlying vulnerabilities. As those programs ended and new supply delivered at scale, rent growth slowed even as operating expenses—especially labor costs, insurance and property taxes—continued to rise.
Floating-rate debt structures further exposed borrowers to interest rate resets, compressing debt service coverage ratios more rapidly than anticipated. The New York region remains the most impacted, likely driven by rent control restrictions in New York City that cap tenant rents while expenses accelerate for the reasons noted above. The directional trend in non-current multifamily loans is uniformly upward across all geographies, underscoring the broad-based nature of emerging multifamily stress.
Geographic Fault Lines in CRE Stress
Across all FDIC regions examined, non-current loan ratios have risen meaningfully in construction, commercial and multifamily portfolios, but the magnitude and pace of deterioration differ by market and asset type. Construction and commercial portfolios in markets such as San Francisco and New York show higher levels of non-current loans, which may reflect office-sector weakness, elevated refinancing risk and earlier recognition of stress in larger, more complex portfolios. Sunbelt markets, including Dallas and Atlanta, exhibit steady increases across construction and multifamily assets, potentially tied to project-level stress from slower absorption, cost pressures, or underwriting assumptions formed during earlier high-growth periods.
Smaller markets such as Kansas City show some of the largest relative increases across asset types, likely influenced by lower starting bases and portfolio concentration, where a small number of stressed credits can disproportionately affect reported ratios. Taken together, these geographic patterns point to a common set of underlying drivers—higher interest rates, asset-specific sensitivity to structural change, local economic exposure and portfolio composition—playing out at different speeds across CRE segments.
Emerging Opportunities
The data indicate that rising non-current loan ratios are not confined to a single asset class or region. Instead, they are progressing sequentially across construction, commercial and, increasingly, multifamily portfolios, with meaningful variation by geography. This evolution is consistent with a lagged credit adjustment moving through bank balance sheets rather than a short-lived or isolated shock. As this process continues, more loans and assets are likely to migrate away from their original capital structures and ownership profiles.
Portfolios with significant refinancing exposure, vintage underwriting assumptions or asset-specific headwinds are more likely to require new capital solutions as banks prioritize balance sheet management and risk reduction while transitioning toward portfolio leverage loan products and business lines. In this environment, the opportunity set is less about broad market exposure and more about pinpointing where stress is emerging first and accelerating most clearly by asset type and geography. Well-capitalized equity investors and lenders stand to benefit from investing in the resulting recapitalization opportunities. The migration of risk to new, stronger hands is already evident in the data, and the authors expect this transition to continue as the credit cycle unfolds further across CRE markets.