Fed Increases Monitoring of CRE Loan Performance
The Federal Reserve is watching commercial real estate borrowing more closely as a potential risk to financial stability, according to a new report from the nation’s central bank. Among other factors, the report cites “dramatically reduced” demand for office space, which could mean a correction in the values of office buildings and downtown retail properties.
“Moreover, the rise in interest rates over the past year increases the risk that CRE mortgage borrowers will not be able to refinance their loans when the loans reach the end of their term,” according to the report. “With CRE valuations remaining elevated … 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 notes that losses on CRE loans “will depend on their leverage because owners of buildings with substantial equity cushions are less likely to default. Also, loans with high loan-to-value ratios are typically harder to refinance or modify.”