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The commercial property sector will likely remain stressed for years, Federal Reserve Chair Jerome Powell told the Senate Banking Committee on the first day of his semi-annual testimony to Congress.
“It is a risk that has been with us and will be with us for some time, probably for years,” Powell warned on Tuesday. “And banks need to be honestly assessing what their risk is. They need to be assured that they have the capital and liquidity and the systems in place to manage this risk.”
He noted that the Fed’s stress tests of U.S. banks this year included commercial real estate risk. “The conclusion is that large banks can manage this problem, and most small banks can too,” Powell said.
Regulators are keeping a close eye on smaller banks with higher exposure to CRE, with half of the $929B in CRE loans due this year in multifamily and office.
“We expect higher for longer rates will continue to pressure credit quality for the next several quarters, pushing more banks to build loan loss reserves through 2024,” Morgan Stanley analysts said last month.
To note, total outstanding commercial/multifamily mortgage debt rose to $4.70T at the end of Q1, data from the Mortgage Bankers Association showed. “Every major capital source increased its holdings of commercial mortgages, as fewer loans than usual were paid off through property sales or refinancings,” said Jamie Woodwell, MBA’s head of commercial real estate research.