The Federal Reserve warned of significant risks for corporate bankruptcy and sharp falls in commercial real estate prices in a report released on Friday.
"Corporate leverage is now near historic highs," the central bank said in its biannual monetary policy report to Congress. "The risk of bankruptcy among small and medium-sized companies and some large companies remains considerable."
Encouraged in part by government and Fed programs, companies took on more debt over the past year as they struggled to cope with the economic and financial consequences of COVID-19, including, in some cases, forced shutdowns.
The Fed report, informing lawmakers about economic and financial developments and monetary policy, was posted on the central bank's website before Chairman Jerome Powell testified before the Senate Banking Committee on Tuesday and the House Financial Services panel a day later .
In the report, the Fed expressed hope for an end to the pandemic later this year, but warned that pitfalls persist.
In particular, the prices for commercial real estate are “susceptible to sharp declines” due to their historically high level. This could prove to be particularly true if the level of distressed sales picks up or if the pandemic results in a longer-term decline in demand, it said.
Commercial real estate could suffer a double blow after the pandemic, some economists say. An increase in the number of people working from home could lead to lower demand for office space, while increased online shopping could lead to more retail closings and additional shopping center vacancies.