Regional banks are still writing down office loans, and the refinancing wall keeps growing

A second-quarter earnings season that regional banks had hoped would mark the end of their office-loan problem instead showed the same slow deterioration continuing, with several lenders reporting higher charge-offs and a larger share of commercial real estate loans moved onto criticized-asset lists.

The exposure at the center of the concern is a cohort of five-year commercial mortgages originated in 2020 and 2021, when interest rates were near zero and office valuations had not yet absorbed the shift to hybrid work. Estimates from commercial real estate data providers put roughly $180 billion of office debt from that vintage coming due between now and the end of 2027. Refinancing it at current rates, against buildings that in many cases are worth 30 to 50 percent less than when the original loan was underwritten, does not pencil out on the same terms.

National office vacancy has held near 20 percent for several quarters, but that figure understates how uneven the pain is. Newer, amenity-heavy towers in top submarkets have continued to lease at healthy rates, pulling tenants out of older buildings that lack the infrastructure to compete. It is disproportionately that older, lower-tier stock — the kind more likely to sit on a regional bank’s balance sheet than a life insurer’s or a CMBS trust’s — where valuations have fallen hardest.

The dominant response so far has been extension rather than resolution. Special servicers and bank workout groups have leaned on maturity extensions, covenant waivers and partial paydowns funded by sponsor equity injections, deferring recognition of a loss rather than realizing one. That approach buys time for either rates to fall or valuations to stabilize, but it also means the loans causing the current wave of criticized-asset growth are largely the same loans that were already on watchlists a year ago, not new deterioration.

Bank management teams have consistently characterized the exposure as a manageable, multi-year workout rather than a solvency event, and loss-absorption capacity built up through reserves since 2023 supports that framing for the industry in aggregate. The risk is concentrated rather than systemic: a small number of regional lenders with outsized office concentrations relative to capital account for a disproportionate share of the criticized balances, and it is those institutions, not the sector broadly, where a renewed downturn in office valuations would be felt first.

The next test arrives with third-quarter results, when the loans that received one-year extensions in mid-2025 come back up for renewal. Whether sponsors show up with fresh equity or hand back keys will do more to clarify the scale of the problem than another quarter of aggregate charge-off numbers.