The Commercial Real Estate Alpha Site

Rising Rates and Geopolitical Risk Are About to Test Banks’ CRE Optimism

by Valerija via CRE Daily <— Click here to read complete article and similar ones.

Just as lenders were starting to breathe easier on commercial real estate, the macro environment decided to make things interesting again.

The good news, briefly: According to S&P Global Market Intelligence, credit loss allowance ratios for CRE loans at U.S. banks fell 12 basis points quarter-over-quarter and 17 basis points year-over-year in Q4 2025. Net charge-offs held flat at 0.23% — well below the alarming levels many had feared. On paper, the banking sector was growing more comfortable with its CRE exposure heading into 2026.

The problem with backward-looking data: Those numbers were recorded before the war in Iran, before the 5-year Treasury yield climbed 19 basis points through Q1, and before BofA Global Research flagged geopolitical tensions and rising yields as reasons to expect CRE transaction activity to stay muted. The stress test that produced the clean Q4 results looks nothing like the environment lenders are operating in today.

Not everyone got the memo: While industry-wide reserve ratios declined, a handful of banks quietly moved the other direction. Pathward Financial raised its CRE allowance ratio by 189 basis points. Mechanics Bancorp, Primis Financial, ConnectOne Bancorp, and First Citizens were among others that increased reserves — a signal that some institutions aren’t ready to call the all-clear just yet.

The refinancing wall just got steeper: Higher medium-term rates mean higher debt burdens for borrowers coming due in 2026. That puts downward pressure on valuations, pushes cap rates higher, and threatens to unwind whatever optimism the late-2025 data had built up — particularly for owners who were counting on a more favorable rate environment to pencil out a refi.

➥ THE TAKEAWAY

Big picture: Declining reserves mean the last cycle of stress didn’t blow up — not that the risk is gone. With rates climbing, a war rattling capital markets, and a refinancing wave still working through the system, the banks that quietly raised reserves this quarter may end up looking prescient.