U.S. commercial real estate malaise spreads to Europe

ATTN: Financial editors

07 February 2024

(Bloomberg) -- The troubles in the US commercial property market, which have already hit banks in New York and Japan, moved to Europe this week, elevating fears about broader contagion.

The latest victim was Germany’s Deutsche Pfandbriefbank AG, which saw its bonds slump on concern about its exposure to the sector. It responded by issuing an unscheduled statement Wednesday that it had increased provisions because of the “persistent weakness of the real estate markets.”

It described the current turmoil as the “greatest real estate crisis since the financial crisis.”

Lenders are taking increasing provisions on debt extended to property owners and developers as loans begin to sour after rising interest rates eroded the value of buildings around the world. On Tuesday, Treasury Secretary Janet Yellen said that losses in commercial real estate are a worry that will put stress on owners, but added that she thinks the problem is manageable.

For offices in the US, where the return to work following the pandemic has been slower and less substantial, the value destruction has been particularly bad. And some predict the full impact might not even be fully priced in yet. Analysts at Green Street said that a further writedown of as much as 15% may be needed this year.

“Appraisal values remain much too high,” they wrote in a note. “Lenders that base their decisions on these appraisals have greater odds of taking impairments” and some could face “strain” as a result.

The plunge in German lenders’ bonds was the latest in a series of warning signals. New York Community Bancorp was cut to junk by Moody’s Investors Service after flagging real estate problems, while Japan’s Aozora Bank recorded its first loss in 15 years due to provisions on loans...