Q&A: The Rising Stresses in the CRE Market

While headlines around commercial real estate have largely focused on the troubled office sector, broader data shows a more complicated picture—one in which certain property types and regions are quietly becoming risk hotspots while others remain sound. To understand what’s really happening under the surface, we spoke with Tom Cronin, product manager at Automated Financial Systems and longtime steward of RMA’s Credit Risk Navigator database. Each month, Cronin helps banks benchmark credit performance across $1 trillion in commercial exposures. 

In this Q&A, Cronin points to rising stress in the multifamily sector and shares what he believes is driving the deterioration, what banks might be missing, and how risk teams can get ahead of potential trouble. 

(Note: “Distressed” loans refer to those classified by banks as “low pass” or “criticized.” Criticized loans include “special mention,” “substandard,” “doubtful,” or “loss.” These ratings indicate a higher level of credit risk than what’s considered “pass” or satisfactory.) 

Where do we stand with office CRE—and where are you seeing pockets of emerging stress in the data, either by sector or geography, that might be getting overlooked? 

Over the past year, when examining the levels of distressed loans—which stand at 40.4% distressed for all CRE—it’s no surprise that office properties are by far the worst. At the end of February 2025, 59.4% of office properties were rated as distressed, up from 55.9% just 12 months earlier. But one other property type has significantly increased its distressed level throughout 2024 and now trails only offices: multifamily. Multifamily—which includes apartment complexes, townhouses, or condominiums with five or more units—has risen from 36.9% distressed as of February 2024 to 46.1% a year later. 

The Southwest region appears to have experienced the most deterioration in quality, rising from 48.5% distressed to 55.5%, with states such as Arizona (56.9%), Colorado (47.8%), and Texas (63.2%) all showing elevated levels. Credit Risk Navigator data also shows substantial decreases in credit quality for apartments in the Northeast, where distressed levels are now 47.1%, up from 42.8% last year. New York state specifically rose to 52.6%, up from 45% in 2024. 

What underlying factors do you think are driving the deterioration you’re seeing, and why might these issues be catching some banks off guard? 

The primary reason for the increase in distressed levels for multifamily properties is the oversupply of high-end units. Upscale properties are overbuilt and seeing higher vacancy rates due to inflationary pressures, which have restricted what consumers can afford. In recent years, with single-family homes becoming so expensive, the thinking was that apartments were the cheaper alternative—and there appeared to be a huge need. 

However, it took time for those projects to be planned and built. In that time, inflation rose, construction costs increased, and so did rents. Since many of the new buildings were higher-end, the increased rents for these units were simply too much for renters to afford, and vacancies have been extremely high. 

Are there specific warning signs or metrics you think banks should be tracking more closely in their own portfolios to avoid being surprised by shifts in credit quality? 

There are a number of measures beyond the usual delinquency and nonaccrual ratios that banks should be watching. The first is vacancy levels. An increase in vacancy is a leading indicator of forthcoming trouble. 

Another early indicator is a borrower’s request for a loan modification. That’s often a clear sign your borrower is experiencing cash flow difficulties. 

What practical steps can credit risk teams take now to get out ahead of potential trouble in these sectors, especially if their internal data or borrower feedback isn’t yet reflecting broader market concerns? 

While performance for most properties is still relatively stable, now is a good time to conduct a property-by-property evaluation—especially for properties with higher risk ratings. 

Banks should also consider adjusting their lending limits based on both property type and risk rating. For example, the lending limit for multifamily properties rated “average” should be lower than the lending limit for retail properties rated “above average.” 

Given what you’re seeing in the data, which areas of the CRE market appear most resilient right now, and how do you expect credit conditions to evolve over the next six to 12 months? 

Over the past year, both distressed and performance levels for retail properties and residential construction loans—specifically those made to homebuilders—have been much better than for other property types. In contrast, we expect credit conditions for certain sectors—particularly office, multifamily, and industrial—to remain poor in the near term. 

Of course, continued economic or credit deterioration could put pressure on even the stronger-performing segments. And just to be clear, these are my observations based on the data—not investment advice.