WASHINGTON–The Federal Reserve is striking a cautious tone over the state of the commercial real estate market and what might lie ahead for the sector.
While the effects of the rapid rise in interest rates has been most apparent in the banking industry, Fed staff members and market experts whom they survey cited commercial real estate as another area worthy of attention in the central bank’s twice-annual Financial Stability Report, which was released earlier this week.
The report notes the jump in interest rates over the past year “increases the risk” that commercial borrowers will not be able to refinance their loans when the loans reach the end of their term. The report further states that commercial real estate values remain “elevated.”
‘Could be Sizeable’
“The magnitude of a correction in property values could be sizable and therefore could lead to credit losses by holders of CRE 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 CRE loans and expanded examination procedures for banks with significant CRE concentration risk.”
It isn’t just rising rates playing a role in a potential downturn in commercial real estate. The ongoing effects from the pandemic, in which most workers began working from home, has led to only partially filled office buildings in many areas, with employers either not renewing space or opting for far less space.
Basis for Report
The Fed 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, the New York Times reported.
“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 added, according to the Times.
Feeling the FOMO Fever? CUToday.info Has a Prescription
Are you missing out on the latest news in credit unions? Missing the trends and developments you need to be aware of? We can help. Each morning CUToday.info delivers its daily Fresh Today news update offering the latest headlines and breaking news right to your email, with the easy-to-read headlines format allowing you to click on the stories that interest you most in order to learn more.
And it’s free!
If you haven’t yet signed up for the new email solution on which CUToday.info has partnered with ResponseGenius, you can do so here. Signing up requires less than one minute of your time—and it’s free!
Please note that after signing up you may need to go to your Spam/Junk folder and mark the morning headlines email as safe. CUToday.info does not provide its list of readers and emails to outside parties, and we will not be contacting you to sell you an extended warranty or sending you any links so you may cash in on an inheritance you didn’t know was coming.
And did we mention it’s free?
Please note and/or make your IT department or email administrator aware the emails will be coming from the domains CUTodayinfo.com and CUTodayinfoReply.com