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Mr. Salih Fendoglu
This note analyzes the implications of changes in commercial real estate (CRE) prices for the stability of the US banking sector. Using detailed bank-level and CRE price data for US metropolitan statistical areas, the analysis shows that, following a decline in CRE prices, banks with greater exposures to CRE loans perform worse than their counterparts, experiencing higher non-performing CRE loans, lower revenues, and lower capital. These effects are particularly pronounced if the drop in CRE prices turns out to be persistent because of possible structural shifts in CRE demand—for example, because of an increased trend toward e-commerce and teleworking—even after the coronavirus disease (COVID-19) pandemic is over. The impact of a decline in CRE prices is especially true for small and community banks, which tend to have the highest CRE loan exposures. While the US banking sector has remained resilient during the pandemic crisis due to strong capital buffers and massive policy support, these findings suggest that continued vigilance is warranted with regard to potential downside risks to CRE prices amidst ongoing structural shifts in the sector.
Mr. Salih Fendoglu

, the decline in CRE transactions and prices has been more pronounced in the United States. Figure 1. Commercial Real Estate Prices and Transaction Volumes during the COVID-19 Crisis Sources: Green Street Advisors; Real Capital Analytics; and author calculations. Note: Panel 1 shows the year-over-year percent change in CRE transactions in the United States and other regions. Panel 2 shows the percent change in average CRE prices, based on appraisal values for different CRE segments in the United States and Europe. Latest corresponds to 2020:Q3 or later

Mr. Salih Fendoglu

Title Page MONETARY AND CAPITAL MARKETS Global Financial Stability Notes Commercial Real Estate and Financial Stability: Evidence from the US Banking Sector No. 2021/01 Prepared by Salih Fendoglu May 2021 DISCLAIMER : The views expressed are those of the author and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. This note analyzes the implications of changes in commercial real estate (CRE) prices for the stability of the US banking sector. Using detailed bank-level and CRE price data for US

Andrea Deghi, Mr. Junghwan Mok, and Tomohiro Tsuruga

increasing divergence in CRE prices across regions and CRE segments (such as retail, office buildings, industrial, and multi-family buildings). Beyond the near-term impact, the pandemic has further exacerbated preexisting adverse structural trends in some segments of the market. This is particularly true for the retail segment, where the demand for traditional brick-and-mortar retail had been gradually eroding even before the pandemic as consumers shifted increasingly toward e-commerce. The COVID-19 shock may have also led to persistent adverse effects on the demand for

Andrea Deghi, Mr. Junghwan Mok, and Tomohiro Tsuruga
The COVID-19 pandemic crisis has severely shocked the commercial real estate (CRE) sector, which could have important implications for macro-financial stability going forward because of the large size of the sector and its strong interconnectedness with the real economy. Using a novel methodology, this paper quantifies vulnerabilities in the CRE sector and analyzes policy tools available to mitigate related risks. The analysis shows that CRE prices were overvalued in several major advanced economies in 2020:Q1. It also shows that such price misalignments increase the likelihood of future price corrections and exacerbate downside risks to future GDP growth. While the path of recovery in the sector will depend inherently on the pace of overall economic recovery and the structural shifts induced by the pandemic, easy financial conditions may contribute to an increase in financial vulnerabilities and persistent price misalignment. Macroprudential policy can, however, be effective in curbing the financial stability risks posed by the CRE sector.