Federal Reserve and commerical real estate risks

On Behalf of | Feb 6, 2017 | commercial real estate

Florida real estate investors and developers should know that Federal Reserve officials are closely watching the prices of high-rise apartment buildings. Ten years after the housing market collapsed in the United States, this part of the commercial real estate sector has the potential of becoming the next asset-price bubble.

In a January speech, Federal Reserve Chair Janet Yellen characterized commercial real estate prices as high, an assessment that has been repeated by other officials in the agency. Commercial real estate is showing indications of being overly active in large markets, including San Francisco, Boston and New York. In lieu of raising federal interest rates at a quicker pace than they currently expect, federal officials have stated that the probable asset price bubbles will be addressed with financial supervision, even as the situation causes some concern.

On Feb. 1, 2017, the Federal Open Market Committee restated the intent to increase interest rates at a gradual pace, and there was no opposition to the decision to allow the federal funds rate target range to remain between 0.5 percent and 0.75 percent. According to the average quarterly estimate submitted by official in December of 2016, the interest hikes will occur in three quarter-point increments.

The Federal Reserve is focused on 2 percent inflation and maximum employment. However, it also has concern about making sure that there is financial stability and that the mistakes of the last financial crisis, which stemmed from an overheated residential property market, are not repeated.

Commercial real estate development can carry risks as well as rewards. Some lenders have exited the market due to increased regulatory scrutiny, and thus developers might want to meet with their attorneys before seeking new sources of financing for their proposed projects.