Yellen: It’s ‘obvious’ that empty office buildings will create banking stress and losses

New York (CNN) — High commercial real estate vacancies are expected to create some stress for smaller banks, Treasury Secretary Janet Yellen said Thursday. However, she said she does not see them as causing a systemic risk to the nation’s financial system.

Posted 3:41 p.m. Feb 8 — Updated 3:41 p.m. Feb 8

Alicia Wallace

, CNN

CNN — New York (CNN) — High commercial real estate vacancies are expected to create some stress for smaller banks, Treasury Secretary Janet Yellen said Thursday. However, she said she does not see them as causing a systemic risk to the nation’s financial system.

Appearing on the Hill as part of annual testimony before the Senate Banking Committee, Yellen told lawmakers Thursday the exposure of large banks is “quite low,” but there may be smaller banks that are experiencing stress related to high office building vacancy rates, high interest rates and falling valuations.

“It’s obvious that there’s going to be a stress and losses that are associated with this,” Yellen said.

Earlier this week, Yellen championed the nation’s economic recovery from the pandemic as well as regulators’ efforts to stave off a potential bank run last spring after the sudden failure of Silicon Valley Bank.

On Tuesday, Yellen said she does “have a concern about commercial real estate.” She noted that higher interest rates and rising vacancy rates in office buildings have combined to cause problems — especially as real estate loans come due.

These issues in cities with high vacancy rates, according to Yellen, are “going to put a lot of stress on the owners of these properties.”

Yellen also added that she believes the issue is manageable, noting that banking regulators and the Financial Stability Oversight Council that she heads are working closely with institutions on how to meet the needs of borrowers.

Yellen’s congressional testimony this week, however, is coming at a time when some regional banks have come under pressure.

New York Community Bancorp recently disclosed a surprise loss and a spike in loan losses as commercial real estate loans go bad.

The troubled regional lender attempted to reassure investors Wednesday that it has enough cash to stay afloat after the stock shed about 60% of its value over the past eight days and Moody’s Investors Service downgraded the bank’s credit grade to junk.

Shares in the Hicksville-based bank, which acquired $40 billion worth of assets from the collapsed Signature Bank last March, were down 2% Thursday morning.

CNN’s Matt Egan contributed to this report.

This story is developing and will be updated.

Suggest A Correction