Office CRE Stress Persists in Bank Filings as Kilroy Sees Gains
Community bank lenders keep flagging distressed office borrowers in central business districts even as one West Coast office landlord reports improving leasing activity.
Burke & Herbert Financial Services Corp. (BHRB), the Virginia-based bank holding company, repeated word-for-word in filings three months apart that "CRE office borrowers in central business districts have been impacted by decreased property valuations, oversupply due to remote work trends, and rising interest rates which has increased default rates and impeded their ability to secure new financing". The unchanged language across a May and an August 2026 filing indicates the bank's assessment of office-sector distress has not eased over the period.
Blue Ridge Bankshares, Inc. also said "certain CRE collateral types have experienced declining occupancy, demand, and rental rates," which could weaken borrowers' ability to service debt, and flagged that higher capitalization rates were complicating refinancing.
Atlantic Union Bankshares Corp. (AUB), a Virginia-based regional bank, reported its CRE loans as a percentage of risk-based capital climbing from 39% in 2025 to 41% in the first quarter of 2026 and 42% in the second quarter, based on bank-level regulatory data disclosed in successive July 2026 investor presentations. The bank listed non-owner-occupied CRE at 25.5% of its book against owner-occupied CRE at 15.0%.
Shore Bancshares Inc (SHBI), a Maryland community bank with a $2.60 billion CRE portfolio, disclosed nonaccrual CRE loans rising to $64.8 million, or 2.49% of the total portfolio, as of June 30, 2026, up from $52.39 million, or 2.02%, at the end of the first quarter. Special mention loans eased slightly to 2.06% of the CRE portfolio from 3.00% over the same period, leaving the credit-quality picture mixed even as nonaccrual balances grew.
Keycorp (KEY), the Cleveland-based regional bank, presented a granular breakdown of its commercial mortgage book by property type and geography, showing multifamily as the largest nonowner-occupied CRE category at 45.8% of the segment, with office at 3.9%. The bank also disclosed a roughly $7 billion real estate lending portfolio carrying an average loan-to-value near 40%, spanning REITs, funds and real estate operating companies.
Kilroy Realty Corp (KRC), a West Coast office and life-science REIT, reported "continuing improvement in commercial real estate fundamentals across our West Coast markets" for the second quarter, citing nearly 400,000 square feet of new and renewal leases executed with re-leasing spreads of 27% and 16% on comparable second-generation space, and pointed to "moderating high-quality supply". Kilroy's leasing disclosures describe conditions distinct from the office-sector default and valuation pressures the community banks flagged for their own CRE office borrowers.
Modiv Industrial, Inc. (MDV), a net-lease industrial REIT, maintained standard risk-factor language warning that "disruptions in the financial markets and uncertain economic conditions could adversely affect the values of our investments" and that "declining economic conditions could negatively impact commercial real estate fundamentals" through lower occupancy and rental rates. Farmers National Banc Corp (FMNB) and Lcnb Corp (LCNB), both Ohio-based community banks, continued to disclose granular loan-to-value and occupancy metrics by CRE industry segment and described ongoing stress-testing of borrower debt service under varied rate and occupancy scenarios, while ServisFirst Bancshares, Inc. (SFBS) detailed CRE mortgage repricing schedules across fixed- and variable-rate maturity buckets carrying weighted average rates as high as 6.56%.
With Atlantic Union's CRE concentration ratio still rising through the second quarter and Shore Bancshares' nonaccrual CRE balances up sequentially, community bank disclosures point to continued monitoring of office and broader CRE credit quality heading into the back half of 2026.