April 18, 2021

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Global Financial Stability Report, April 2021: Analytical Chapters

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Chapter 3: Commercial Real Estate: Financial Stability Risks During the COVID-19 Crisis and Beyond


The coronavirus disease (COVID-19) crisis has hit the commercial real estate sector hard. Containment measures implemented in response to the pandemic severely affected economic activity and reduced the demand for commercial property. Part of the adverse impact—particularly on the retail, office, and hotel segments—could be permanent, as some activities may continue to take place virtually in the future and others may relocate outside of large cities. The large size of the commercial real estate sector and its heavy reliance on debt funding suggest that these developments may have potentially significant implications for financial stability. Against this backdrop, this chapter attempts to identify and quantify financial stability risks arising from the commercial real estate market and discusses policy tools available to mitigate such risks. While the path of recovery in this sector will depend inherently on the structural shifts induced by the pandemic, continued policy support remains warranted at the current juncture to keep financial conditions easy and stimulate aggregate demand to aid the sector’s recovery. However, easy financial conditions may contribute to an increase in financial vulnerabilities and persistent price misalignment. Targeted macroprudential policy tools should be swiftly deployed to address such vulnerabilities. Efforts should also focus on broadening the reach of macroprudential policy to cover nonbank financial institutions, which are important players in commercial real estate funding markets.