Tariffs Threaten to Mute Optimism Around CRE Lending

There is more optimism around commercial real estate lending … or at least there was.

In recent years, banks have taken a more cautious approach to CRE as the office sector, in particular, struggled and overall credit quality worsened. But it seemed as if bankers were once again ready to embrace growth in this portfolio earlier this year. Seventy-two percent of respondents to Bank Director’s 2025 Risk Survey anticipated growing their CRE loans this year.

But the tariff threat has raised fears over the potential of an economic downturn, which could mean borrowers and lenders alike take a step back. Normally, commercial and industrial loans are thought to have greater risk from tariffs, but there’s also worry that CRE could be impacted.

“You have to look at it through two lenses,” says Lonnie Hendry, chief product officer at Trepp, a data and analytics firm. “One is in the first quarter of 2025 before the tariff announcement. We were seeing significantly increased loan origination. … The second is [the] post-tariff announcement. Even with the 90-day pause, there is a lot of uncertainty and that really puts a pause on CRE activity.”

CRE lending has historically been a bread-and-butter business line for banks, especially smaller institutions. But borrowers have been reluctant to take out credit due to high interest rates. And banks tightened their lending standards in the wake of the regional bank failures in March 2023, followed by the troubles at New York Community Bank, a regional bank heavily concentrated in CRE. That tightening included institutions no longer completing purely transactional CRE loans where the bank had no other relationship with the borrower, says Jon Winick, CEO of Clark Street Capital, a bank advisory and asset disposition firm.

As a result, CRE lending has been lackluster. Fourth-quarter non-farm non-residential loans were flat from the third quarter and inched up 1.4% from the fourth quarter of 2023, according to the fourth-quarter summary of the industry’s financial metrics from the Federal Deposit Insurance Corp.

CRE lending fared slightly better at community banks. At these smaller institutions, fourth-quarter non-farm nonresidential real estate loans increased by 2.2% from the same period a year earlier and rose about 1% from the third quarter, according to the FDIC.

Total commercial mortgage origination volume has increased. In the fourth quarter, these originations totaled $5.6 billion, up from $4.5 billion in the third quarter of 2024 and $3.9 billion in the second quarter of last year, according to an analysis from Trepp. However, this was still below pre-pandemic levels.

“I do think CRE was starting to rebound,” Winick adds. “Banks were beginning to recognize they need loans. The origination activity has certainly gotten stronger.”

A number of factors were likely driving the renewed interest in CRE borrowing. There was pent up demand from some potential borrowers sitting on the sidelines while interest rates have been high. There were also hopes that the November 2024 election would bring some certainty to the market, Hendry says. And sales pricing around CRE buildings has stabilized.

“There was some certainty coming back into the market,” Hendry adds. “The unknown factor had disappeared at some level. We had hit an inflection point where we were accepting that the current interest rate environment was here to stay and the underwriting and pricing changed with that.”

Still, problem loans have been elevated in recent quarters. Non-owner occupied CRE loans that were at least 30 days overdue or in nonaccrual status fell 5 basis points, to 2.02%, in the fourth quarter. But that was still above pre-Covid-19 levels by 129 basis points, according to the FDIC. The agency said this was largely driven by issues with office loans concentrated at banks with at least $250 billion in assets.

A number of large companies have ordered their employees to return to working in the office, and there are hopes that will bolster this segment. But it remains to be seen how faithfully these mandates will be followed. Kastle Systems, which provides security to commercial buildings, tracks keycard and fob usage at 2,600 buildings in 47 states that it serves. It releases data each week that looks at a 10-city average. According to this, the average was 53.4% for the week of April 16. Hendry notes that building utilization hovered around 75% to 80% before Covid.

“Until you see a meaningful improvement, then I’m still skeptical,” Winick said of return-to-office mandates.

However, Hendry is more optimistic. He believes the office sector has survived the worst, and employers are no longer downsizing their square footage to accommodate fewer staff members being in the building. Because of that, he believes the segment has stabilized. “Most tenants are on a hybrid schedule and that means for those three or four days, they should have high attendance and they can’t reduce their footprint,” he adds. “There have been enough positive shifts that the building owners have moved away from the fear of the tenants cutting their footprint in half.”

Economic uncertainty tied to higher tariffs is another potential threat to CRE loan growth. That could mean commercial borrowers pull back on the demand for credit and banks once again tighten underwriting. Since late March, Goldman Sachs increased its prediction of the likelihood of a recession from 20% to 45%.

“The tariffs are one of the things banks need to think about in their underwriting standards,” says Trang Sumpter, director of financial services advisory at Moss Adams. “They need to cherry pick the types of loans and transactions they agree to do. Previously, the borrower might have been close to meeting the debt service coverage but now if they don’t, then the bank might want to be more strategic.”

The $7 billion First American Bank in Elk Grove Village, Illinois, largely focuses on new construction in different areas of CRE, including multifamily, industrial, retail and hospitality. John Olsen, executive vice president of the bank’s CRE lending, says that CRE loan demand has been strong so far this year, though that could change if there is economic pain tied to tariffs. This could be especially true for new construction. The bank operates in Miami where buildings are constructed with concrete made with materials imported from Mexico and in Illinois and Wisconsin where lumber brought in from Canada is necessary for new development. Buildings are also outfitted with appliances and other materials normally imported from other countries.

All of this could mean new construction becomes prohibitively expensive if the tariff issue isn’t settled. Trump had previously imposed tariffs of 25% on goods from Canada and Mexico but later carved out exceptions for many items that were covered by a previous trade agreement. Goods that fall outside of that previous agreement are subject to a 25% tariff.

So far, Olsen says the bank’s clients haven’t seen a significant cost increase. And some developers are hopeful that enough of their competitors will pull back on projects that lower demand for materials could keep pricing down. First American is already a conservative lender, so Olsen doesn’t predict the bank will drastically change its underwriting if a downturn does come to pass.

“We think if we are able to maintain that level of discipline there are still going to be opportunities,” he adds. “Do we reduce the leverage a bit to create more room if there are price increases? Maybe we require stronger debt coverage if costs go up. … But we are still moving forward if the opportunities make sense.”