US banks are struggling with overdue commercial real estate (CRE) loans due to sector stress, high interest rates, and vacant offices.

This has led to weak office demand, potentially causing borrowers to default and pressure banks to avoid selling loans at steep discounts.

Banks have recorded provisions for credit losses and charge-offs from the previous quarter, with Morgan Stanley setting aside $134 million for credit losses in its Q3 earnings announcement.

Other banks have also reported difficulties in CRE holdings, with Goldman Sachs cutting its office-related CRE exposure by 50% this year and Bank of America’s third-quarter non-performing loans rising to nearly $5 billion.

Smaller regional banks have more CRE exposure than larger banks, with regional or smaller lenders owning 70% of CRE loans.