FSOC Discusses Commercial Real Estate Loan Risk

The commercial real estate (CRE) market is struggling a bit as the work-from-home (WFH) movement, combined with the flight of businesses away from certain markets that were once hot, has caused some observers to predict calamity at some point in the not-so-distant future. We have already seen reports that a large real estate investor walked away from two significant hotels in San Francisco, turning the keys over to the firms that held the debt on the buildings. As occupancy tanked, valuations cratered, and it simply made no sense to continue making payments. There is chatter that other hotels in San Francisco may do the same as city leadership fails and loans come up for refinancing. Once a hotbed of success and innovation, San Francisco is now better known for rampant drug abuse and crime and incompetent city management.

Today, FSOC [Financial Stability Oversight Council] distributed the readout from its meeting, noting that it discussed worries about the CRE market.

To quote the document:

“The Council also received an update from staff of the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation on potential risks in the commercial real estate (CRE) market.  Exposure to CRE loans at depository institutions has been increasing, with higher levels of concentration at smaller institutions.  While delinquency rates remain low, vacancy rates have been increasing, particularly in the office sector.  Regulators are taking steps to emphasize risk management and examine exposures to CRE loans at their regulated institutions.”

The document did not review what measures regulators are taking to mitigate the CRE risk, which may see some financial institutions saddled with buildings they do not want, worth a fraction of what was once believed accurate.

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