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Fed Says Vulnerable CRE Sector Could Take Hits


The Federal Reserve said in a recent report that valuations in commercial real estate appear susceptible to negative hits, particularly because prices are shooting up too quickly.

In its report the Fed says real estate prices “appear increasingly vulnerable to negative shocks, as CRE prices have continued to outpace rental income,” Bloomberg reports.

The sector is also vulnerable to some volatility due to uncontrollable factors such as the UK’s possible exit from the EU, according to the Fed, though it did note that at present prices moderately exceed their pre-financial crisis peaks.

In the semiannual Monetary Progress Report to Congress, which accompanies Chair Janet Yellen’s testimony, the Central Bank said its price-to-earnings ratios for forward-looking stocks have increased well above its average for the past three decades.

“Although equity valuations do not appear to be rich relative to Treasury yields, equity prices are vulnerable to rises in term premiums to more normal levels, especially if a reversion was not motivated by positive news about economic growth,” the Fed said. [Bloomberg]