As the nation’s largest banks reported their second-quarter results, a cautious optimism has to emerged around commercial real estate, a sector that has remained under scrutiny amid elevated interest rates, sluggish deal flow, and ongoing concerns about office valuations.
Most consumers continue to manage their debt obligations, and demand for new credit from both households and businesses is picking up after a slow start to the year. Corporate leadership sentiment has also improved, with management teams showing more confidence than they did in the first quarter.
Investors gained these insights after the six major U.S. banks—JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley reported second-quarter earnings, offering new evidence that credit quality in commercial real estate is beginning to stabilize, marking a shift from the defensive posture seen earlier this year.
“CRE lending hasn’t thawed across the board, but this quarter showed that some banks are stepping back into the market with discipline,” said Manus Clancy, head of Data Strategy at LightBox. “The worst-case fears from haven’t materialized, and lenders are starting to recalibrate based on that.”
The shift signals a new phase in the CRE credit cycle. Banks are still risk-sensitive, especially around refinance exposure and office, but the Q2 results suggest that capital is moving again, selectively, and under tighter underwriting standards.
Q2 Bank Earnings: What You Need to Know
- CRE Risk Stabilizing: Losses flattening, especially in office; banks reducing reserves.
- Selective Lending Returns: Capital trickling back with tighter underwriting.
- Risk Offloading: Loan sales to private credit firms accelerate.
- Consumers Holding Steady: Spending up, credit performance remains solid.
- Caution Persists: Unsecured lending & tariff risks still on banks’ radar.
- H2 Outlook: Liquidity is back—but only for borrowers with strong fundamentals.
CRE Portfolios Show Signs of Stabilization as Risk Shedding Continues
The second quarter offered some of the clearest signs yet that commercial real estate losses are beginning to level off, particularly in the office segment. After reporting elevated charge-offs in late 2024 and early 2025, several of the largest banks noted an improving trend in Q2.
Wells Fargo reported a decline in commercial real estate charge-offs during the second quarter, citing improved performance across previously stressed office assets. CFO Mike Santomassimo said that while the bank still expects further losses, “valuations appear to be stabilizing” and any additional stress “should be well within our expectations.”
The bank also reduced its allowance for credit losses (ACL) tied to CRE office loans by $105 million, bringing the total down to $2 billion. The ratio of reserves to loans remained steady at 7.9% quarter over quarter. Within the Corporate and Investment Banking division, the office ACL ratio declined slightly to 11.1% from 11.2%. These adjustments reflect a combination of charge-offs already taken and improved confidence in portfolio performance. While Wells Fargo’s CRE loan book contracted 1.1% year-over-year, it suggests a continued effort to manage exposure while selectively working through legacy office risk.
A broader trend across the market supports this posture. Several banks have begun offloading portions of their CRE portfolios to private credit firms, a sign that risk shedding is happening not just through charge-offs and reserve reductions, but also through active loan sales. Atlantic Union’s recent $2 billion deal with Blackstone, involving a pool of commercial mortgages, is one example of how balance sheet risk is being repositioned into nonbank hands. These transactions allow traditional lenders to free up capital while limiting long-term exposure, even as they cautiously step back into new originations.
Bank of America, meanwhile, recorded an increase in commercial charge-offs, up $133 million to $466 million, “driven primarily by sales and resolutions of commercial real-estate office properties,” the bank said.
“This distinction matters,” Clancy emphasized. “Asset resolutions, even at a loss, suggest movement in the market and a willingness among lenders and borrowers to accept current valuations and move forward.”
Goldman Sachs, though not a major CRE lender, posted $3.88 billion in CRE-related gains from repositioned CRE assets in its asset management division. CFO Denis Coleman noted during the earnings call that the firm had been proactive in addressing real estate risks, leading to fewer write-downs this year. This performance highlights how institutions outside the core lending market are playing a critical role in real estate risk resolution.
“Office is still the sector to watch, but the worst of the markdowns may be behind us,” said Clancy. “Several of the major lenders are signaling that resolution is underway, especially for assets that were already flagged last year.”
The tone around CRE in Q2 was still cautious, but no longer defensive. Banks continue to limit new originations and prioritize relationships with existing borrowers. Still, the trendlines suggest that credit performance has found a footing. But it’s not just commercial real estate showing signs of life. Consumer credit – a bellwether for the broader economy – is also proving surprisingly resilient, adding another layer of confidence for banks navigating a still-uncertain economy.
Reserves Reflect a Shift Away from Worst-Case Expectations
One of the more notable shifts in Q2 was how banks approached loan loss provisioning. While credit quality remains a central focus, most of the largest institutions either trimmed reserves or held them flat, suggesting a move away from the defensive posture seen earlier in the year.
JPMorgan reduced its loan loss provision in Q2 after increasing it sharply in the first quarter. The bank set aside $2.4 billion for credit losses, down from $3.3 billion last quarter, citing lower net charge-offs and a more stable macro outlook. “The consumer basically seems to be fine…We continue to struggle to see signs of weakness in the consumer segment.”
Bank of America increased its credit loss provision slightly, up to $1.6 billion from $1.5 billion in Q1, but noted that the assumptions driving the increase were tied to macroeconomic forecasts rather than new asset-level deterioration. The bank highlighted resilience in its consumer lending book noting: “Consumers remained resilient, with healthy spending and asset quality, and commercial borrower utilization rates rose,” said the bank’s chief executive Brian Moynihan.
Citigroup and Morgan Stanley kept overall reserves relatively steady. Citigroup added $224 million to its allowance for credit losses, consistent with modeled expectations, while Morgan Stanley made no material changes. Neither bank flagged new pressure in commercial real estate.
Consumers Are Still Spending but Banks Remain Cautious
Consumer resilience was a recurring theme across second-quarter bank earnings. Retail sales in June rose 0.6%, tripling expectations of a 0.2% gain, according to the U.S. Census Bureau. Spending increased across autos, clothing, restaurants, and building materials—categories that often support retail and mixed-use real estate fundamentals.
Bank executives acknowledged the strength in consumer activity, though most stopped short of calling it a full recovery. JPMorgan and Bank of America described household credit performance as broadly stable, with spending levels holding up despite elevated interest rates. “Consumers remained resilient, with healthy spending and asset quality,” said Bank of America CEO Brian Moynihan.
Goldman Sachs struck a more cautious tone, citing “pockets of stress” in unsecured lending and signaling limited appetite to expand risk exposure in the consumer segment.
“The continued strength in consumer spending offers some reassurance for retail property owners, especially those with essential or service-based tenants,” said Dianne Crocker, research director at LightBox. “But banks remain justifiably cautious. While household spending is holding up, lenders are closely monitoring how potential tariff-related cost pressures could affect credit conditions. This watchful stance is keeping retail loan growth in check and prompting more conservative underwriting, particularly for discretionary or non-essential retail development.”
The net result is a mixed picture. Consumers are still spending, and retail-facing CRE may benefit in the short term. But from a credit standpoint, lenders will be on close watch for signs of a retreat in consumer spending, which could spell trouble for certain retail borrowers that are particularly vulnerable to tariffs.
CRE Lending Enters a New Phase in The Second Half of 2025
The second half of 2025 opened with the clearest signals yet that commercial real estate credit markets have stabilized enough to support increased deal flow. Big bank earnings reflect stabilization across key credit metrics, a more measured approach to reserves, and signs of resolution in office portfolios. Lenders remain cautious, but they are starting to underwrite based on current market realities rather than reacting to past disruptions.
Macroeconomic uncertainty continues to shape the outlook. Even so, momentum is building around recapitalizations, discounted asset sales, and select acquisition financing, particularly in situations where pricing has already adjusted.
“The capital stack is shifting,” said Clancy. “CRE pricing isn’t firm across the board, but the floor is starting to form. Lenders are re-underwriting based on today’s values, not last cycle’s. That’s where we’ll see movement in the second half of the year; low-leverage deals, transitional assets, and capital providers who know where to draw the line.”
For borrowers and investors, the next phase of the market will demand precision. Valuation clarity, strong operating performance, and strategic alignment with lender expectations will separate those who can access capital from those who cannot. Liquidity is returning, but only on revised terms.
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