U.S. Office Winter: Hints of Spring in a Frozen Market

This commentary reviews U.S. banks' exposure to commercial real estate (CRE) office loans.

Key highlights include:
-- Despite U.S. office vacancies holding at a stubborn 20%, new AI-driven leasing activity hints at a potential revival that could defy today's frosty outlook.

-- Major U.S. banks have reduced their office exposure, reinforcing their financial buffers and carefully navigating volatile market conditions.

-- The Federal Reserve stress tests showed these institutions remaining healthy even if commercial real estate values plunge.

"Glimmers of stabilization, led by AI-driven tech companies and a partial return to on-site work mandates, indicate that a gradual and uneven recovery may be underway. CMBS is also back as a funding option with 2024 volume more than doubled from 2023, and this strength is expected to continue in 2025. While larger banks and regional institutions are both contending with asset quality stresses and charge-offs, many have strengthened their reserves and diversified their portfolios, positioning themselves to better weather ongoing uncertainties. Although challenges persist, prudent risk-management practices should help mitigate near-term risks and lay a foundation for a recovery in the future," said Mindula Suriyabandara, Senior Analyst, Credit Ratings - NA FIG.