Janet Yellen: Small Bank Lending + Commercial Real Estate ‘Crane Forests’ = RISK

By | February 15, 2017

historic commercial real estate prices

With commercial real estate valuations at levels exceeding 2007-2008, and with no shortage of new construction on the horizon, small bank lenders could be vulnerable!

These snippets from a few different sources describe Janet Yellen and the Federal Reserve’s somewhat cautionary tone.

‘Commercial real estate (CRE) valuations, which have been an area of growing concern over the past year, rose further, with property prices continuing to climb and capitalization rates decreasing to historically low levels.’ (Federal Reserve)

‘Rising commercial real estate prices may leave some small banks vulnerable to a drop in the market, the Federal Reserve said Tuesday. In a report to Congress on financial stability, which accompanied Fed Chairwoman Janet Yellen’s testimony to the Senate Banking Committee, the central bank said that commercial real estate prices, which have been an area of growing concern at the central bank, rose further.’ (MarketWatch)

CRE lending risk to banks

Commercial real estate ‘debt that nurtured this boom to these heights. This debt has ballooned to $1.98 trillion, and is now 14% higher than during the crazy peak of the prior bubble that collapsed with such spectacular results:’

The Fed is careful not to sow panic among bank investors. So it couches its message in a big “while” and some other mollifying words, before getting to the meat at the very end of its long sentence, namely that a “sizeable” decline in CRE prices could take down “smaller banks”:

While CRE debt remains modest relative to the overall size of the economy and the tightening in bank lending standards for CRE loans in the second half of last year may reflect some reduction in the appetite for CRE lending, the heightening of valuation pressures may leave some smaller banks vulnerable to a sizable CRE price decline.

And “smaller banks” are precisely what’s the most on the hook: they hold about $1.22 trillion of these CRE loans.’ (Wolf Street)

So are the levels of CRE debt and value anything to be concerned about…It all depends on who you ask!


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