If one segment of the lending industry is any indication, bank crises brought on by subpar office loans in the United States are just getting started.

In the United States, banks provide around half of all commercial real estate loans. Until it’s too late, they frequently withhold information concerning the condition of the loans or the properties they have taken out against. When lenders set aside hundreds of millions of dollars as provisions for probable future losses, as occurred recently at New York Community Bancorp and Japan’s Aozora Bank, that may be when investors first learn of issues. Since the lenders disclosed that U.S. office loans were souring in recent weeks, their shares have plunged 53% and 34%, respectively.

One might obtain an indirect understanding of the mounting pressure on the lending books of certain institutions. A useful proxy for commercial real estate financing in the United States is commercial mortgage-backed securities, which make up 14% of the total. The CMBS market provides useful monthly statistics on building valuations and default rates.

What became of the office CMBS debt maturing last year, about which property experts were so concerned? It was billions of dollars. Only 26% of the $35.8 billion in office CMBS loans that matured in 2023 were fully repaid, according to real estate data company CRED iQ. This was due to borrowers’ difficulties selling their assets or obtaining refinancing.

A special servicer, a third party that looks for the best way to handle debt, may foreclose on the property, renegotiate the terms, or extend some maturing mortgages. Other mortgages were transferred to this third party. A dedicated servicer currently oversees over 1,000 CMBS office loans with a combined value of $14.8 billion.

By the end of January, 10.5% of CMBS office debt was in distress, indicating that the pool of distressed loans is increasing. Loans classified as distressed are ones that have been transferred to a special servicer or are more than 30 days past due on their payments. According to CRED iQ statistics, this is more than three times the rate observed a year ago and is probably going to increase further as an additional $46.6 billion in CMBS office loans mature through 2025.

The CMBS market’s office valuation data appears bleak. The buildings receive an updated appraisal to ascertain their fair market value when loans are transferred to a specific servicer. According to CRED iQ, out of a list of 220 distressed loans with recent reappraisal data, the average worth decline for offices is 40%. Revalued buildings in 2023 had an almost 50% drop.

This may not be the worst of the loans listed on banks’ records. Banks have leeway to bargain with borrowers behind closed doors and have likely been more cautious with their loan-to-value ratios. Furthermore, if the debt exceeds the value of the building, landlords will find it simpler to return the keys because CMBS loans are non-recourse. If a bank borrower has personally guaranteed the loan, then there is more at stake.

However, bank stockholders will still receive nasty surprises when loans mature. Furthermore, it is more difficult for banks to “pretend and extend” when office buildings start to sell for substantial discounts. Loan appraisals will increasingly need to take office deal data into account.

It’s hard to predict where the next issue may arise. US and foreign banks have billions of dollars’ worth of office debt on their books, but Rich Hill, senior vice president of real estate investment firm Cohen & Steers, claims that there isn’t much information disclosed regarding who holds loans on a property-by-property basis.

He stated, “We are aware that there is an issue, but it’s difficult to pinpoint the exact extent across lenders.”

In the heart of any major American city’s business area, the surrounding structures are considerably less valuable and more deserted than they were four years ago. Trusts investing in listed office real estate have previously had to deal with the music: Since before the pandemic, the value of the S&P 500 Office REITs Sub-Industry Index has been nearly half. The banks are only now starting to face reality.