Commercial Real Estate Loans Go Quiet at Regional Banks in Q3

Lenders talk up business loans and play down property

Third-quarter bank earnings show where lenders want growth to come from, and commercial property is mostly not on the list. Banks spent the quarter emphasizing business lending and said little about new property loans. When commercial real estate did come up, it was usually about credit problems, not new business.

PNC's results show the pattern. Average loans rose 2% from the prior quarter to $372 billion, and commercial and industrial balances grew $9 billion, or 4%.44 Commercial real estate balances also grew 4%, but that was only $2 billion.44 The more telling detail was in credit. Nonperforming loans rose $167 million to $2.2 billion, which management attributed mainly to office loans it had already reserved against working their way through the system, plus one unrelated commercial borrower. CFO Robert Reilly said the bank had long expected those office loans to move into nonperforming status and eventually into charge-offs.

U.S. Bancorp was more direct. CEO Gunjan Kedia said commercial real estate and residential mortgages were the only areas where demand had slowed, calling them "very muted." She described business loan demand as "quite robust and broad based." Another executive on the call named commercial real estate as the area the bank was watching.

Regions Financial, which reported on October 16, showed the same split. Average business loans rose 1% in the quarter, driven by commercial and industrial lending to government, wholesale and financial-services clients.17 Its investor real estate book did grow. The bank said that growth came largely from short-term bridge loans to apartment owners, because high long-term interest rates have slowed permanent refinancing.17 That is lending to fill a gap in the refinancing market, not a renewed appetite for offices or speculative construction.

The aggregate numbers: growth slowing, not shrinking

"Quiet" does not mean banks are cutting their property books. Federal Reserve data put commercial real estate loans at all U.S. commercial banks at about $3.14 trillion in the week ending September 30.11 Small domestically chartered banks, the category that includes most regional and community lenders, held about $2.11 trillion.13 The Fed's weekly H.8 release shows the all-bank total rising from about $3.02 trillion to roughly $3.13 trillion over the period it covers, with the most recent weeks nearly flat.16

Wolf Richter's review of the Fed's Z.1 financial accounts makes a stronger case that banks have returned to growth. Bank property loan balances rose $88 billion, or 2.9%, in the year to the second quarter, after staying roughly flat through 2024 and early 2025 while banks sold off problem loans.12 By that count, banks hold a record $3.1 trillion, about 47% of the $6.3 trillion in outstanding commercial real estate debt.12 The same analysis shows that the fastest growth is happening elsewhere. Fannie Mae and Freddie Mac grew their apartment lending 8.2% year over year, and commercial mortgage-backed securities balances rose 7.4% to $771 billion.12

The two readings fit together. Banks are still adding property loans in absolute dollars, but their growth is slower than that of government-backed lenders and the securities market. Within banks, property lending is falling behind the business lending executives now favor. One small-business lender commenting on Richter's analysis said the small regional banks and credit unions it works with have tightened standards: they now lend less against a property's appraised value, require more income coverage and treat appraisals with more skepticism.34 That is one practitioner's account, not survey data, but it matches what large-bank executives said on their calls.

How one loan shook Bank OZK

The clearest example of why regional banks are cautious this quarter is Bank OZK, a Little Rock lender that The Real Deal calls arguably the most important bank in commercial real estate.33 Its shares fell more than 5% after Citi analysts described a roughly six-week extension of a $915 million construction loan to IQHQ's San Diego life-sciences campus as a stopgap meant to avoid a default.31 The bank signed the amendment on September 30, but it took effect as of August 26, after the original maturity date had already passed.31 Citi said the short window pointed to serious financial distress at the project.33 The 1.7 million-square-foot development cost $1.6 billion and opened in 2024 without a tenant.33

The bank pushed back. A spokesperson said short extensions are routine while longer agreements are being drafted.31 According to a later regulatory filing, OZK extended the loan's maturity to December 2029 after the sponsor and its capital partners put in $100 million to pay down principal.36 OZK will likely argue on its earnings call this month that the outcome supports its position. But the episode showed that one large construction loan can move the market value of a bank worth about $5 billion.36

OZK had already been pulling back. Real estate fell to 47% of its loan portfolio in the second quarter, down 5 percentage points from the first quarter. Its $1 billion in real estate originations made it one of its slowest quarters in five years, which the bank partly blamed on developers struggling to raise equity.33 The stock was down 11.47% over 90 days even before the IQHQ news, and analysts tie the drop more to credit worries than to the rest of the business.35 OZK is still making construction loans. This week it provided $132.7 million for a 344-unit mixed-use project in Culver City.40 Those loans are increasingly for apartments and mixed-use projects, not empty labs or offices.

Office vacancy remains the main problem

Banks are cautious about offices because high vacancy has become a lasting condition in many markets. Third-quarter broker reports show improvement in some places and stagnation in others, and many of the largest downtowns still have about a quarter or more of their space empty.

Cushman & Wakefield put downtown Seattle vacancy at 35.8%, up 70 basis points from a year earlier, and said speculative office construction is unlikely to start soon.5 Chicago's central business district rose to 25.5% vacancy from 24.9% at midyear, and its suburbs stayed at 26.7%.2 Phoenix finished the quarter at 23.7%, almost unchanged from a year earlier, with top-tier Class A buildings at 28.3%.7 In Los Angeles, direct vacancy of 16.4% was higher than a year earlier, and Class A total vacancy reached 22.9%.4

The markets that are improving tend to be shrinking supply rather than adding tenants. Minneapolis vacancy fell to 27.0%, and Cushman attributed much of the drop to obsolete buildings being taken out of inventory.10 On Long Island, vacancy reached a recent low of 11.6%, helped by nearly 2.9 million square feet of office space demolished since 2020.6 Demolition and conversion can lower vacancy rates, but they do not restore the value of the original loans. That is why office loans keep appearing in nonperforming totals like PNC's even as some headline vacancy figures improve.

Data center financing comes mostly from outside banks

Data centers are the exception in commercial property, and that capital mostly does not run through regional bank balance sheets. Data center REITs gained 33% so far in 2026, more than twice the 15% gain for REITs overall.29 Digital Realty has 1.4 gigawatts under construction at a total cost of $20 billion. The pipeline is 63% pre-leased with an expected stabilized yield of 11.5%.28

The financing comes from project-finance lenders, private credit and securitization. One industry overview says project-finance lenders provide most construction loans for new data centers. It cites $16 billion in construction financing that Related Digital and Blackstone arranged in the first half of 2026 for an Oracle-leased campus in Michigan, and $61 billion in data center asset-backed and commercial mortgage-backed securities outstanding.26 Hyperscale-leased construction loans reportedly price at about 250 to 400 basis points over SOFR.26 Private credit funds are offering yields of 7% to 10% on these loans, backed by the credit strength of large hyperscale tenants.24

The public-market side is getting crowded and has its own risks. CNBC reports that Blackstone's new data center REIT has performed poorly since its May debut and that Blue Owl may launch a REIT worth up to $6.5 billion. CNBC also lists project delays, power and permitting limits, and refinancing risk among the dangers.23 One tracker estimates that about $130 billion across roughly 75 data center projects was blocked or delayed in the first quarter alone.30

Analysis: the shift looks deliberate

The coverage points to a deliberate strategy rather than a temporary pause. Regional and super-regional banks are directing growth toward business loans that carry less risk. PNC acknowledged that this mix is lowering its margins. Their property lending is concentrated in apartment bridge loans and owner-occupied space, while office problems are gradually written off against reserves set aside years ago. The best-performing part of commercial real estate, data centers, is financed mainly through structures that bypass bank balance sheets.

For regional banks, the cost is less exposure to the strongest property sector. The benefit, as the OZK episode showed, is avoiding the kind of single-loan surprise that investors punish quickly. PNC CEO Bill Demchak said higher interest rates will eventually reduce business investment and borrowing, which could hurt the business-loan pipeline banks now depend on. If that happens, banks will need another source of loan growth, and offices with vacancy in the 20s and 30s are unlikely to be it.