Economy Watch: Boston Fed President Warns of Overheated CRE Market

While financial institutions have largely recovered since the Great Recession, Boston Fed President Eric Rosengren warned about the danger of being too confident.
Eric Rosengren, President & CEO, Federal Reserve Bank of Boston
Eric Rosengren, President & CEO, Federal Reserve Bank of Boston

Is the commercial real estate sector too hot? That seems to be on the mind of at least one Federal Reserve chief, roughly 10 years after the real estate credit freeze of 2007 that presaged the financial meltdown the next year. Last week Federal Reserve Bank of Boston President Eric Rosengren aired his concerns about real estate at the Asia-Pacific High Level Meeting on Banking Supervision in Bali.

“Because real estate holdings are widespread, and the monetary…tools for handling valuation concerns are somewhat limited, I believe we must acknowledge that the commercial real estate sector has the potential to amplify whatever problems may emerge when we at some point face an economic downturn,” Rosengren said.

That happened before, of course. “In the United States the two most significant recent periods of financial instability were accompanied by declines in real estate values that impacted financial institutions and intensified the business cycle,” the Boston chief noted.

Commercial real estate cap rates are very low by historical standards, he added, meaning that price increases have been outpacing growth in net operating income. “This is occurring despite the gradual tightening of short-term interest rates and the issuance of real estate guidance by bank regulators.”

Rosengren also said that recent growth in lending has been significant. “Over the past year, holdings of commercial mortgages by the banking sector have increased 8.9 percent, while bank holdings of multifamily mortgages have increased 12 percent,” he noted.

Rosengren stressed that he was not predicting problems, but rather suggesting continued work to head them off. He said that improvements since the financial crisis have left financial institutions with better capitalization and liquidity, and resolution plans. But he warned against overconfidence.