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Federal Reserve Chairman Jerome Powell told the Senate Banking Committee on the first day of his semi-annual congressional testimony that the commercial real estate sector is likely to remain tough for years to come.
“This is a risk that we've had and will probably have for many years,” Powell warned on Tuesday. “Banks need to honestly assess what their risks are. They need to be confident that they have the capital and the liquidity and the systems in place to manage this risk.”
Powell noted that commercial real estate risks were included in the Fed's stress tests of U.S. banks this year. “The bottom line is that big banks can handle this, and most small banks can handle it too,” he said.
Regulators have been scrutinizing smaller banks with large exposure to CRE, with half of the $929 billion in CRE loans maturing this year being for multifamily and office buildings.
“We expect prolonged higher interest rates to continue to pressure credit quality over the coming quarters, leading to an increase in banks building loan loss reserves through 2024,” Morgan Stanley analysts said last month.
Notably, total outstanding commercial and multifamily mortgage debt rose to $4.70 trillion at the end of the first quarter, data from the Mortgage Bankers Association showed. “All major capital sources increased their commercial mortgage holdings as paydowns from property sales and refinancings were lower than usual,” said Jamie Woodwell, head of commercial real estate research at the MBA.