Boston Fed President Airs Concerns About Risks to CRE

Speaking at a recent NYU Stern School of Business conference, Boston Fed President Eric Rosengren pointed to some favorable tailwinds accompanying rising CRE valuations, but stressed the importance of evaluating how a potential recession could affect the financial system.
Eric Rosengren, President & CEO, Federal Reserve Bank of Boston
Eric Rosengren, President & CEO, Federal Reserve Bank of Boston

A variety of favorable conditions account for some of the elevated CRE valuations, but it’s worth asking what could go wrong and cause a reversal, argued Boston Fed President Eric Rosengren, speaking in New York on Tuesday at the Risk Management for Commercial Real Estate Financial Markets Conference at NYU’s Stern School of Business.

“While I do not expect that a downturn in commercial real estate prices would by itself cause a significant problem for the economy, in some past recessions such an occurrence has propagated an initial adverse shock—and by constraining financial intermediaries, made the extent of the subsequent economic downturn more severe,” Rosengren said.

This isn’t the first time he’s talked this way. Rosengren, returning to a theme in other speeches, said that the regulatory community must remain attuned to developments, understand how a reversal may propagate through the financial system, and consider whether the system is resilient enough to withstand such shocks.

The central banker acknowledged a number of favorable “tailwinds” accompanying rising CRE valuations, including low and stable inflation, accommodative monetary policy, and the relative economic strength in the U.S. compared with the rest of the world. Rosengren also cited greater urbanization, later marriage age, and preferences among the large cohort of Millennials as favorable trends for multifamily.

Rosengren further noted that the GSEs have significant holdings or guarantees of multifamily loans outstanding. If future reform proposals required the GSEs to reduce their holdings of multifamily loans, “a potential and significant shock to this sector of the commercial real estate market could occur.”

Rosengren concluded by explaining that leveraged institutions and GSEs have significant exposures to CRE. In the event of a bad scenario such as a recession, these exposures could “pose significant risks to these institutions.”