The Commercial Real Estate Reckoning Has Arrived
Office vacancy rates in major US cities have hit 20-30 percent. The banks that financed the boom are beginning to reckon with losses. The signals suggest the worst is still ahead.
Signal
Office vacancy rates in the ten largest US cities averaged 23 percent at the end of 2025 — a level that has no precedent in the post-World War II commercial real estate cycle. San Francisco hit 35 percent; downtown Chicago reached 27 percent; Manhattan, which had been insulated by New York's persistent in-office culture, reached 22 percent. The vacancy rate is not simply a reflection of economic weakness; it reflects a structural shift in how office space is used that is driven by the normalization of remote and hybrid work following the COVID pandemic.
Approximately $1.5 trillion in commercial real estate loans are scheduled to mature by the end of 2026. Many were originated at low interest rates during the 2020-2022 period, with loan terms based on pre-pandemic occupancy and rent assumptions. Refinancing at current rates, and on valuations reflecting current vacancy, produces a significant gap: properties that were financed at 60 percent of value in 2021 now have loan-to-value ratios above 100 percent at current market prices, meaning the loan exceeds the value of the collateral.
Interpretation
The commercial real estate situation has two distinct components that are sometimes conflated in public commentary.
The first is the structural vacancy problem, which is primarily an urban planning and economic development challenge: what do you do with millions of square feet of commercial office space in central business districts when the demand for that space has structurally declined? Conversion to residential use — the most discussed solution — is technically challenging (office floor plates are typically too deep for residential conversion without significant structural modification), financially complex (the unit economics often don't pencil without significant subsidy), and time-consuming (conversion projects typically take three to five years to complete).
The second is the banking system problem: the concentration of commercial real estate exposure in regional and mid-sized banks (which collectively hold a larger share of CRE loans than the largest banks), the maturity wall of loans scheduled for refinancing, and the potential for a feedback loop in which CRE loan losses reduce bank capital, tighten credit availability, depress CRE values further, and generate additional losses.
The banking system problem is the more acute near-term risk. The largest banks have sufficient capital buffers to absorb significant CRE losses; the regional banks that are most exposed have thinner cushions and are already under stress from the 2023 regional bank disruptions (Silicon Valley Bank, Signature Bank, First Republic).
Probability
Kalshi was trading a contract on whether at least 5 FDIC-insured banks will fail primarily due to commercial real estate loan losses before the end of 2026 at 38 percent. This is meaningfully elevated relative to the baseline bank failure rate of roughly 1-2 institutions per year in non-crisis periods.
Metaculus forecasts a 51 percent probability that commercial real estate values in major US cities will be at least 30 percent below their 2021 peak values in 2026-2027 assessments. The current decline from peak is approximately 25 percent; whether the remaining adjustment occurs over years or quarters depends significantly on the refinancing wall dynamics and credit availability.
Indicators to Watch
— Quarterly bank earnings releases: CRE loan loss provisions by regional banks signal how quickly losses are being recognized — CMBS delinquency rates: commercial mortgage-backed securities delinquencies are a leading indicator of the broader CRE credit cycle — Lease renewal rates: the share of maturing office leases that are being renewed (at what square footage and rate) determines whether vacancy is stabilizing — Downtown foot traffic data: cell phone mobility data provides a near-real-time proxy for office building occupancy and the health of associated retail
The commercial real estate cycle is not a short-term disruption. The structural shift in office space demand is durable; the capital structure of the sector has not yet fully adjusted to reflect it; and the financial system implications of that adjustment will play out over multiple years.
Miles Thornton is a contributing writer at The Auguro covering financial markets, monetary policy, and macroeconomic forecasting.