A Warning From the Fed on Commercial Real Estate
Author: Greg Valliere
May 9, 2023
THE MAIN RISK is that commercial borrowers will not be able to refinance their loans when the loans reach the end of their term, the report said. This could increase “the magnitude of a correction in property values,” which could be sizable and therefore could lead to credit losses by holders of commercial real estate debt,” the report said.
STILL STUNG BY ITS SLOW REACTION to bank failures this spring, the report pledged that “the Federal Reserve has increased monitoring of the performance of C.R.E. loans” and has “expanded examination procedures for banks with significant C.R.E. concentration risk.” the report said.
AS WE REPORTED LAST MONTH, commercial real estate — especially here in Washington, D.C. — appears to be moribund, as employees continue to work at home. Many downtowns in the U.S. look nearly deserted.
THE REPORT WARNED of deteriorating conditions in the bank sector in general. It’s getting more difficult to borrow, the report said, and this could “lead banks and other financial institutions to further contract the supply of credit to the economy.” It added that “a sharp contraction in the availability of credit would drive up the cost of funding for businesses and households, potentially resulting in a slowdown in economic activity.”
THIS, IN OUR OPINION, is perhaps the strongest argument for the Fed to pause its rate increases; tomorrow’s Consumer Price Index will be crucial. Interest rate reductions later this year still seem unlikely — but a clearly deteriorating commercial real estate sector is an ominous wild card, as yesterday’s Fed report indicated.
* * * * *
AS THE SUSPENSE BUILDS over this afternoon’s White House summit on the budget, it strikes us that a Constitutional challenge to the debt ceiling is gaining supporters. But any attempt to use the 14th amendment to wiggle out of a debt deal would generate a fierce blowback from Republicans, with a quick legal path to a Supreme Court ruling.
THE WHITE HOUSE is determined to use every tactic available to avoid a default, and novel legal and regulatory approaches are now on the table. Our best bet is that both sides will pledge this afternoon to re-double their efforts, but if there’s no deal by early June, an extension until fall would be the most likely outcome. A deal is still weeks or months away.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. Our companies deliver excellence in investing in the public and private markets through three business lines: AGF Investments, AGF Capital Partners and AGF Private Wealth.
AGF brings a disciplined approach, focused on incorporating sound, responsible and sustainable corporate practices. The firm’s collective investment expertise, driven by its fundamental, quantitative and private investing capabilities, extends globally to a wide range of clients, from financial advisors and their clients to high-net worth and institutional investors including pension plans, corporate plans, sovereign wealth funds, endowments and foundations.
Headquartered in Toronto, Canada, AGF has investment operations and client servicing teams on the ground in North America and Europe. AGF serves more than 800,000 investors. AGF trades on the Toronto Stock Exchange under the symbol AGF.B.
For further information, please visit AGF.com.
©2025 AGF Management Limited. All rights reserved.
