Not Everyone Is Overly Worried About New White House Focus On CRE Sector

The effect of commercial real estate (CRE) debt and the sector's performance has sounded an alarm at the White House. 

According to a report from Reuters, the Biden administration is now closely tracking developments in CRE and its weight in the banking sector. The report points to White House beliefs that many smaller and mid-sized banks that have "nontrivial" holdings in the CRE sector. 

Jared Bernstein, a White House Council of Economic Advisers (CEA) member, told the Senate Banking Committee that one of the concerns is that occupancy rates in CRE were well below pre-COVID levels and delinquencies had risen a bit recently. However, they remained low in historical terms.

"The issue is very much on our watchlist," Bernstein said during his CEA nomination hearing after being asked by Senator Mark Warner (D-VA) about the impact of the collapse of the Silicon Valley Bank (SVB) CRE sector. Warner warned that close to $6 trillion in outstanding commercial debt was related to the real estate market, calling it a "massive dislocation.” Bernstein added, "That is a relevant, germane concern.”

A much-touted statistic from the end of 2022 continues to be bandied about as justifying one of the more significant concerns regarding the CRE sector – office space. According to the year-end report from global brokerage firm Cushman & Wakefield, the vacancy rate for office buildings rose to a record high of 18.2% by late in the year, even topping 20% in key markets like Manhattan, Silicon Valley and even Atlanta. 

That report preceded announcements from companies like Microsoft Corp. and Meta Platforms Inc., which shed tens of thousands of square feet of office space in California and Seattle. San Francisco, which NBC Bay Area this month referred to as a “ghost town,” had an office vacancy rate of 30% and rising at the end of the first quarter. 

Federal Reserve Chair Jerome Powell has stressed that the collapse of Silicon Valley Bank and Signature Bank were outliers whose failures had nothing to do with real estate but said at a March 22 press conference, “We’re well aware of the concentrations people have in commercial real estate. I really don’t think it’s comparable to this. The banking system is strong, it is sound, it is resilient, it’s well capitalized.”

Moody Analytics’ Director of Commercial Real Estate Analysis Kevin Fagan offered that CRE performance is definitely not improving but says its impact is limited. 

“There’s a lot of headaches about calamity in commercial real estate,” Fagan said. “There likely will be issues, but it’s more of a typical down cycle.”

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