06202023

Financial Stability Experts at the Fed Turn a Wary Eye on Commercial Real Estate

“The magnitude of a correction in property values could be sizable and therefore could lead to credit losses by holders of C.R.E. debt,” the report said — noting that many of those holders are banks, and particularly smaller banks.

“The Federal Reserve has increased monitoring of the performance of C.R.E. loans and expanded examination procedures for banks with significant C.R.E. concentration risk,” the report said.

The Fed’s comments on commercial real estate amounted to muted watchfulness rather than a full-throated warning — but they come at a time when many investors and economists are closely monitoring the sector. The outlook for office buildings in downtown areas, where workers have not fully returned after a shift to remote work that began during the coronavirus pandemic, has emerged as a particular concern on Wall Street.

The report included a survey of 25 professionals at broker-dealers, investment funds, research and advisory organizations, and universities, and those respondents ranked commercial real estate as their fourth-biggest financial stability concern — behind risks from interest rate increases, banking sector stress, and U.S.-China tensions, but ahead of Russia’s war in Ukraine and an impending fight in Congress about raising the debt limit.

“Many contacts saw real estate as a possible trigger for systemic risk, particularly in the commercial sector, where respondents highlighted concerns over higher interest rates, valuations and shifts in end-user demand,” the report said.

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