Federal Reserve Chair Jerome Powell is back on Capitol Hill, ready to mesmerize (and probably snooze) the crowd with his twice-yearly financial sermon.

 

Yesterday, he teased us with the idea of potentially lowering interest rates soon, but let's address a key topic he covered that everyones glossing over.

Powell's got a new nightmare that's sure to keep him and his team of money magicians tossing and turning: commercial real estate. I've been talking about this issue for a while now, and it's getting worse—so much so that even J. Powell is sounding the alarm.

Those once-thriving office spaces and retail hubs? They're now ghost towns, and this could spell doom for some banks. In his recent chat with the Senate Banking Committee, Powell delivered the grim news. He warned lawmakers that the Fed is having some serious heart-to-hearts with lenders, urging them to brace for potential losses. 

Echoing Treasury Secretary Janet Yellen, he hinted at upcoming bank failures but assured us it's a manageable mess. Think of it as a controlled burn, not a raging wildfire.

"We've got our eyes on the banks deeply entangled in commercial real estate, especially those drowning in office and retail properties," Powell said. "This problem’s going to stick around for years, like that annoying relative who never leaves. Expect some bank failures, but don’t panic—your money's safe with the big guys."

Financial regulators have been on high alert for months, watching the commercial real estate markets like a hawk eyeing its prey. Take New York Community Bancorp, for example. 

The bank’s troubles, due to a hefty chunk of apartment loans in New York’s rent-regulated complexes, sent investors into a frenzy. Just when things seemed bleak, a cavalry led by former U.S. Treasury Secretary Steven Mnuchin rode in, injecting a cool $1 billion and reviving the bank’s shares.

Meanwhile, Martin Gruenberg, the top dog at the Federal Deposit Insurance Corp. (FDIC), pointed out that non-current loans for non-owner-occupied commercial real estate have hit their highest rate since 2014. He reassured us that the banking industry is robust, but some loan portfolios, especially those tied to office spaces, need a watchful eye. It’s like saying the ship is solid, but a few cabins are starting to leak. Very reassuring right?

If you think Powell's warnings are just theoretical musings, think again. The evidence is in the fire-sale prices of commercial properties all over the country. Recently, two office buildings in Greenwood Village, Colorado, sold for a song, with prices slashed by up to 87% from their previous sale prices. 

The 135,000-square-foot building at 8390 E. Crescent Parkway, which went for about $30 million in 2015, was snapped up for a mere $11.85 million. Its neighbor, the 82,000-square-foot building at 8350 E. Crescent Parkway, saw an even steeper drop, from $17.25 million in 2014 to just $2.3 million.

(Source: The Denver Post)

And it’s not just happening in Colorado. In San Francisco, the iconic David Hewes Building, which once housed WeWork and even Burning Man’s headquarters, sold for 90% less than its 2016 price. So the next time you get caught bag holding a meme stock for a few hundred dollars, just remember, there’s always someone out there who’s got it worse.

Powell didn’t sugarcoat the situation. He predicted that commercial real estate will be under stress for a long time.

"Banks need to get real about their risks," Powell said. "They must ensure they’ve got the capital, liquidity, and systems to handle this. Our recent stress tests show the big banks are up to the task, and most small banks are too. But some smaller banks, those with heavy local commercial real estate ties, are being closely monitored by supervisors and regulators to make sure they can weather the storm."

So, there you have it. Jerome Powell is ringing the alarm on commercial real estate, and while he’s confident in the resilience of the big banks, a few smaller ones might not make it out alive. But hey, to end on a positive note, with an interest cut coming soon, maybe one day you’ll be able to afford a house.

Stock.News does not have positions in companies mentioned.