MNI BRIEF: US CRE Poses Limited Threat to Stability - OFR

The weakening U.S. commercial real estate sector poses "limited" risk to financial stability as the large increase in property values in recent years should prevent widespread lender credit losses, the Treasury Department's Office of Financial Research said in a note Thursday.

Rising interest rates and a slowing economy has pressured overall CRE prices and pushed up most capitalization rates and down property values. Lower property values will cause loan performance degradation at CRE lenders, especially those with high loan-to-value ratios, OFR analysts said in a blog post. A permanent pivot to working from home will also continue to weigh on demand for offices, they said.

"Financial-stability risks arising from the CRE market are expected to be limited overall," they wrote. "While CRE credit impairments will rise during coming quarters, they are unlikely to cause meaningful stress at more conservative lenders, such as banks and insurance companies."