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Risks in commercial real estate financing

New insights from the Research Division

The FRED Blog has discussed the stress in the rental industry during the COVID 19-induced recession and the recent tightening in lending standards. Today, we focus on a broad change in the commercial real estate market brought about by the pandemic and its downside risks for the financial sector.

The FRED graph above shows data from the Board of Governors of the Federal Reserve System about the percent change from a year ago in the value of commercial real estate loans made by all commercial banks. The monthly data are available since June 2005.

Cycles of expansion and contraction in lending are clearly visible, but the underlying fundamentals in the real estate market are not. For example, the pandemic boosted the ability to work away from the office and reduced the demand for office space. Weaker demand depresses prices and lowers the collateral value of commercial real estate loans. That, in turn, increases financial risks for lenders.

Recent research from Miguel Faria e Castro and Samuel Jordan-Wood at the St. Louis Fed explore the financial risks associated with recent trends in the commercial real estate market. They find the risks from a potential downturn in that market are concentrated in smaller banks and not in the large bank holding companies that are commonly perceived as “too big to fail.”

For more about this and other research, visit the website of the Research Division of the Federal Reserve Bank of St Louis, which offers an array of economic analysis and expertise provided by our staff.

How this graph wase created: Search FRED for and select “Real Estate Loans: Commercial Real Estate Loans, All Commercial Banks.” From the “Edit Graph” panel, use the “Edit Line 1” tab to change the units to “Percent Change from Year Ago.” Last, use the “Format” tab to change the graph type to “Bar.”

Suggested by Diego Mendez-Carbajo.

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