Federal Reserve Board Gov. Christopher Waller was in the Twin Cities recently and I had a chance to listen to him speak on monetary policy. He was asked about real estate.
“Work from home has created a big glut of office space relative to demand,” he said. “That is going to depress prices in commercial real estate. Somebody is going to lose some money. The question is, who?”
Waller noted many buildings were financed when interest rates were lower. As leases renew, building valuations are going to be lower and “you are not going to be able to roll over as much of the loan for the lower-value building. Somebody’s got to eat the loss.”
Waller expressed concern that banks with CRE loans might end up with defaults and losses on their balance sheets, but also acknowledged that they’re holding reserves against potential losses.
“There is going to be a redistribution of wealth. Someone is going to lose money in these buildings and someone is going to get a hell of a deal. That is what I hear all the time,” Waller said. “There is a lot of money sitting there waiting for these buildings to come up.”
Waller summarized: “It is predictable, it is manageable. Banks are already preparing to handle the losses, so this shouldn’t cause a recession or big downturn in the economy.”
His comment reminds us that with every change in prices, there are winners and losers; it just depends on which side of the deal you are on. I was talking to Bryan Bruns recently, president of Lake Central Bank in Annandale, Minn., about an hour west of the Twin Cities. He said there are 26 lakes within a 10 mile radius of the bank. Bruns said that since the pandemic, many more people are electing to spend more time in the Annandale area, working remotely. “We are seeing more people work in our area; it helps our town,” Bruns said.
The additional demand caused by the heightened interest in working from the cabin has added value to the homes in the area. So while it is true that WFH has hurt the value of commercial property in metro downtowns, it has given lake property and recreational property in vacation areas a boost in value. It’s tough if you specialize in lending to commercial office buildings, but it has been a plus for those specializing in loans to finance the purchase of vacation homes.
Waller may understand a thing or two about vacation property in Minnesota. He grew up in Minnesota, and in response to a question about what he likes about the state he said: “Snow. When I was young I loved to ski. When I was a kid I thought how could you ever live without snow? Old people would talk about moving to Florida. Well, it looks pretty good to me now!
“You might remember that the 1970s were a mini ice age. It was super cold. And it wasn’t cold enough in Minneapolis, I had to go to college in Bemidji. When I tell people how cold it would get in Bemidji, people would stare at me. ‘You can’t be serious,’ they would say. ‘Yeah, 30 below zero, what’s the big deal?’ They would just stare at me.”
Waller was appointed to the Fed in 2020 by Donald Trump. The Wall Street Journal suggested in a February article that if Trump is elected this fall, he would appoint Waller chair of the Federal Reserve when Jerome Powell’s term concludes in May 2026