Fed board member warns of systemic problems in real estate finance market

People walk in the rain by commercial real estate for rent along 125th Street in the Harlem area of New York City.

NEW YORK - An executive who serves on the board of the New York Federal Reserve warned on Friday of possible systemic problems in the real estate finance market and called for the industry to work with authorities to avoid things getting out of hand.

Scott Rechler, a large property manager and developer, said that the bulk of the debt was financed when the base interest rates were near zero. This debt needs to be refinanced in an environment where rates are higher, values are lower, in a market with less liquidity. Rechler said he joined the Real Estate Roundtable in calling for a program that gives lenders the leeway and flexibility to work with borrowers to develop responsible, constructive refinancing plans. If we don't act, we could have a systemic crisis with our banking system, especially the regional banks, which make up over three quarters of real estate lending, which will in turn put pressure on local governments that depend on property taxes to fund their operations, Rechler wrote.

The executive weighed in with broad concern in markets that aggressive Fed rate hikes aimed at lowering high inflation will also break something in the financial sector as collateral damage to the core monetary policy mission.

The Fed pushed for a short-term rate target on Wednesday after the collapse of Signature Bank and Silicon Valley Bank rattled markets. The firm's troubles with managing its holdings was linked to the failure of Silicon Valley Bank, as markets repriced to deal with higher Fed short-term interest rates.

Commercial real estate has been hampered by the shift away from in-office work during the Pandemic, and the real-estate sector has been hard hit by Fed rate rises and commercial real estate.

According to a press conference Wednesday following the Fed's quarter point rate rise, central bank leader Jerome Powell said that the banking system is strong, it is sound, it is resilient, and should limit other financial firms from hitting the trouble that felled SVB.

Rechler is a Class B director on a 12 person panel of private citizens who oversee the New York Fed. The board of directors is elected by the private banks of the regional Feds to represent the interests of the public. Each of the quasi-private regional Fed banks is under the oversight of the Board of Governors of the Fed in Washington, which is explicitly part of the government.

The boards overseeing each of the regional Fed banks are made of bankers, business and non-profit leaders. These boards give advice on running large organizations and local economic intelligence. Their most visible role is to help regional Fed banks find new presidents, although bankers who serve as directors are not part of this process by law.

Central bank rules state that directors aren't involved in bank supervision and regulation activities, which are controlled by the Fed in Washington.