Reports proclaiming the recovery of the US commercial real estate sector may well prove to be premature, despite the celebrations of some investors pronouncing its comeback.

Despite a number of high profile deals involving marquee properties in some of the biggest US cities, commercial property values are still badly depressed throughout the country, and they are unlikely to improve for some time to come. Only when the economy is able to generate significant jobs growth will things pick up, and that looks like being a while off yet, say some observers.

For many smaller sized banks, a sluggish recovery could well prove to be fatal, and is exactly what looks to be on the cards right now. With small community banks having a much higher percentage of commercial properties in their assets portfolios, many are vulnerable to mass defaults in the near future, something that could well cause many of these lenders to go bust.

Small money lenders together hold $724 billion worth of commercial mortgages that will be maturing in the next five years, and if commercial property values in cities such as Indianapolis or Cincinnati fail to improve before those loans are due, numerous borrowers will have no way out.

Mass defaults are a real possibility.

“Nobody has looked at how many banks could be in trouble,” says Daniel Neidich of Dune Real Estate Partners. “When more than a third of your assets are overvalued, that’s going to cause any bank a great deal of problems.”

It appears to be a race against the clock.

And according to Ben Carlos Thypin of the Real Capital Analytics market analysis firm, it’s a race that many banks may well lose. “There isn’t a chance that commercial property values will increase enough to avert disaster,” he says.

Many smaller lenders are only surviving due to the lifeline given to them by the FDIC, which allowed banks to extend their loans maturity dates back in 2009. This policy, known as the “extend and pretend” policy by many cynics, has meant that many banks could avoid writing down many commercial mortgages they have provided.

But the question is, for how much longer will the FDIC continue this policy? At some point, it will become impossible to overlook what is obvious insolvency.

The problem is that, despite the supposed recovery in bigger cities like Washington DC and New York, commercial real estate in smaller cities is still struggling.

Many properties that were sold at or before 2007 have seen their values eroded significantly, and borrowers are now unable to either pay the interest on those mortgages, or refinance the loans which are due when they mature.

This situation has propelled mortgage delinquencies to almost 5.4%, whereas the traditional level has always been around 1%, according to Trepp, a firm which analyzes real estate loans in the US.

US commercial banks hold around $952 billion in commercial real estate loans which are set to mature in the next five years, and as much as 18% of these exceed the property’s value by more than 20%. It is these that are most likely to default, according to Trepp.

“It will be the smaller banks that struggle to deal with it,” says Matt Anderson, the Managing Director of Trepp.

13 banks, including the Cortez Community Bank in Florida and the Community Central Bank in Michigan, were sunk by high delinquency rates last month, which was the highest number of bank failures since last July. In these cases, commercial property loans totaled 79% of non-performing loans.

Trepp says that it counts 466 banks across the US which are at risk of failing, out of a total of 7,500 banks in the US overall.