Banks Ease CRE Reserves Just as New Storm Clouds Gather Article originally posted on Globe St. on April 3, 2026 Banks may be relaxing their guard on commercial real estate credit, but the supposed all-clear is colliding with a harsher reality of higher rates and war-driven uncertainty that could still derail a fragile recovery. According to S&P Global Market Intelligence, credit loss allowance ratios for commercial real estate loans at U.S. banks fell sharply in the 2025 fourth quarter, dropping 12 basis points quarter-over-quarter and 17 basis points year-over-year, outpacing the eight-basis-point sequential and 10-basis-point annual declines across all loans. It showed “improved confidence in commercial real estate loan portfolios despite ongoing market uncertainties,” it wrote. The improvement came as borrower demand increased and bank lending standards eased into a quarter marked by stable delinquencies, a welcome change after several years of stress in the sector. Credit performance metrics backed up that optimism, at least on the surface. In the fourth quarter of 2025, net charge-offs to total CRE loans held roughly flat quarter-over-quarter at 0.23% and fell 11 basis points from a year earlier. “[D]espite earlier concerns about commercial real estate loan quality, actual credit losses have not materialized at alarming rates, providing some reassurance to the banking sector,” S&P Global wrote. Together, the declining allowance ratios and steady charge-offs painted a picture of a banking system growing more comfortable with its CRE exposures. But those numbers are backward-looking, and they were recorded before a new shock hit. The quarter also occurred before the war in Iran, which could have severely negative effects across the economy, including commercial real estate. The results for 2026 might be quite different as investors and lenders confront rising geopolitical risks layered on top of already elevated borrowing costs. During the first quarter of this year, medium-term interest rates climbed sharply as the yield on 5-year Treasurys rose 19 basis points through March 31, lifting base interest rates to which risk premiums are added. Those higher interest rates are increasing debt burdens for refinancing borrowers and putting downward pressure on property values as markets demand higher capitalization rates. That dynamic threatens to cut short the anticipated turnaround in the commercial real estate market after years of efforts to stabilize conditions. For owners dependent on refinancing in 2026 and beyond, the shift from improving credit metrics to tightening financial conditions could quickly erase the comfort implied by lower reserve levels. Research houses are already warning that the combination of war and yields may keep capital on the sidelines. BofA Global Research expects CRE transaction activity to remain muted amid geopolitical tensions and higher Treasury yields, which pose financial risks. Property prices have largely stabilized in 2025, but the broadening war in the Middle East and disruptions to oil trade and broader supply chains could put anticipated property price gains through 2026 on hold. What looked like the start of a more active, price-supportive transaction environment now risks becoming another year of delay. Not all banks responded to the late-2025 landscape by cutting reserves. There were also public banks that increased CRE allowance ratios in the fourth quarter of 2025, suggesting a more cautious stance at some institutions despite sector-wide trends. The top ten were Pathward Financial, up 189 basis points; Mechanics Bancorp, up 94 basis points; Primis Financial Corp., up 67 basis points; ConnectOne Bancorp, up 58 basis points; Northwest Bancshares, up 53 basis points; First Citizens BancShares, up 50 basis points; Eagle Bancorp, up 50 basis points; Summit State Bank, up 47 basis points; and Cathay General Bancorp, up 36 basis points. Their moves underscore that even as industry-wide reserve ratios decline, some lenders are still bracing for the possibility that today’s improved metrics will not hold in a more volatile 2026. For commercial real estate investors, the emerging picture is less a victory lap than a warning label. Declining reserves and steady losses say the last cycle of stress is under control, but rising rates and escalating geopolitical risk suggest the next phase could be much harder than the backward-looking data implies.