Treasury Secretary Janet Yellen said that while losses in commercial real estate are a worry, U.S. regulators are working to ensure that loan-loss reserves and liquidity levels in the financial system are adequate to cope.

A combination of factors “is going to put a lot of stress on the owners of these properties,” Yellen told lawmakers Tuesday in the first of two days of congressional testimony this week. She cited the increase in interest rates, higher vacancy rates thanks to shifting work patterns triggered by the pandemic and a wave of commercial real estate loans coming due this year.

“I’m concerned,” she said in responding to a question from Missouri Democrat Emanuel Cleaver. “I believe it’s manageable, although there may be some institutions that are quite stressed by this problem.”

Property owners came under pressure as borrowing costs soared, causing companies including Brookfield Corp. and an office landlord managed by Pacific Investment Management Co. funds to default on debt. Office owners are particularly struggling as higher borrowing costs complicate financing and tenants pull back given layoffs and the rise of remote work.

The Treasury chief said banking supervisors have been focused on the issue, looking to make sure lenders’ reserves and liquidity are adequate to handle the problem.

Yellen on Tuesday appeared before the House Financial Services Committee. She’ll address the Senate Banking Committee on Thursday. Both appearances are intended to give lawmakers a chance to question her on the annual report of the Financial Stability Oversight Council.

(With assistance from Katanga Johnson.)

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