Welcome to the latest edition of Inside Real Estate Today. My name is Rich Hill. I'm Global Head of Real Estate Strategy and Research at Principal Asset Management.

Credit has become a renewed focus of investors over the past several weeks, if not months. As a result, in this edition of Inside Real Estate Today, we're digging into bank's exposure to commercial real estate debt and what it means for the commercial real estate market. Maybe along the way, we'll separate fact from fiction.

Regional banks are important lenders to the CRE market. According to MSCI RCA data, they held around 19% lending share in the first half of 2025. While this is up from around 17% in 2024, it's well below peaks in the high 20% range over the past couple years.

Net net, we think regional banks have around 70% share of all loans held on bank balance sheets. That means that they hold around 31.5% of all commercial real estate loans across all lender types. That said, the senior loan officer opinion survey, published on a quarterly basis by the Fed, shows the tide is beginning to turn.

And while banks were restrictive over the past two and a half years, they are beginning to loosen standards. In fact, lending standards were unchanged in the third quarter of 2025, and loan demand increased for the first time since 2022.

Why is this important? Well, there's a directional relationship between lending standards as defined by the Senior Loan Officer Opinion Survey in year over year changes in unlevered commercial real estate valuations. We think this speaks to an environment where unlevered CRE valuations can continue to accelerate in the coming years.

That said, the stress is still rising. We see total outstanding distress across the CRE market, around $126.5 billion. That's well below peaks during the GFC, but still the highest level we've seen since late 2012. At the same time, delinquency rates across all lender types have risen above historical averages.

So why is distress rising? Well, we think this cycle is playing out in textbook fashion. Let's walk through three steps. First, listed REITs trough. They trough first because they are leading indicators in both downturns and recoveries. Listed REITs troughed in October of 2023, and total returns now stand around 35% above those levels.

Second, private valuations trough around 12 to 18 months after listed REITs trough. They've troughed around five quarters ago. However, the stress does not peak out until around 12 to 24 months after private valuations trough. Case in point-- during the GFC, CMBS delinquency rates peaked out 24 months after private valuations troughed.

Why does that occur? Well, we describe it as the grieving process. Delinquency rates only peak out and distress only rises when you've reached to the acceptance stage of the grieving process.

This leads me to my final point, the recovery in commercial real estate valuations. There's been a lot of hand-wringing about commercial real estate prices being down 20% to 25% over the past several years. But there's been far less focus on the recent rebound. In fact, all four major property indices are now showing valuations above their trough. But what we think is even more interesting is the dispersion in the recovery.

When we look at the top 50 markets across all property types, with the exception of office and storage, the top tier of markets have recovered more than 10%, and in many cases, they're up 15% to 20%. There is a strong recovery occurring, but it's not being picked up in the headline indices, given the law of averages.

This is a theme that we're going to focus on a lot more in the year ahead. So pay attention to our 2026 outlook, which we hope to publish in January.