Federal Reserve Remains Concerned About Office Sector

It’s a new year, but the Federal Reserve’s concerns for the office sector — and banks’ exposure to it — remain the same.

The Fed flagged the “continued weakness” in the office sector, according to minutes from the central bank’s meeting last month reported by Crain’s.

Policymakers cited the pipeline of distress still to come in the sector, saying “the large volume of loans scheduled to mature over the next few quarters suggested that delinquencies would likely surge again.”

The Fed’s concern is centered on the firms exposed to the distress after providing loans: Banks hold roughly $3 trillion worth of debt across the commercial sector, according to the Congressional Research Service.

At the heart of concerns for commercial real estate is rising interest rates, which the agency last month signaled were due for cuts in 2024. In the Fed’s springtime Financial Stability Report, a survey of 25 professionals ranked commercial real estate as the fourth-biggest financial stability concern, behind only interest rate increases, banking sector stress and tensions between the United States and China.

Prior to that report, the Fed in a February meeting discussed commercial real estate’s impact on the economy, mentioning concern over loans provided to office landlords.

None of these meetings led to much in the way of concrete action to come to the aid of commercial landlords, but relief could be on the way this year.

After the central bank held rates steady during its final deliberations of 2023, the Fed signaled there could be several interest rate cuts in the coming year, which could spur the investment sales market and aid building owners who have struggled to refinance properties as the cost of borrowing surged.

— Holden Walter-Warner