The Fed maintains that persisting issues in commercial real estate, primarily the increasing amount of office buildings sitting empty, pose a threat to the stability of the financial system as a whole. The Fed doesn’t give much thought to any particular office landlords, but it does care a lot about the banks that gave them loans that might not be repaid.
That caution was issued last week and was hidden deep inside the minutes of the Fed’s most recent meeting. “In their discussion of issues related to financial stability,” the minutes read, “several participants discussed vulnerabilities in the financial system associated with higher interest rates, including the elevated valuations for some categories of assets, particularly in the CRE sector.” The Fed’s warning highlights how, even three years after COVID-19 decimated the office sector, landlords of office properties are continuing to experience increasing levels of worry, especially as many high-profile office landlords struggle to stay current on their mortgages.
The Fed announced that stress tests will be carried out in the spring to determine how well banks would do in the event of a general slowdown in the economy, particularly in the commercial real estate sector. Although details on what those stress tests will involve were not revealed.