Recent global events have sparked fears of a commercial real estate crisis in Europe, mirroring situations in Japan and the US. Notably, Deutsche Pfandbriefbank AG faces significant downturns due to the real estate market's weakness.
The past week has witnessed significant downturns in the stock values of several banks worldwide, particularly those with substantial exposure to commercial property loans.
Mirroring unsettling developments in Japan and the United States, Europe is now facing the prospect of an emerging commercial real estate crisis.
Some senior officials at the European Central Bank say Germany will inevitably be a special focus as they examine CRE risks at banks across the region.
“There is more pain to come in real estate valuations, so what does that mean for lenders and does that mean there is the potential for a crisis?”
German banks have the most commercial real estate loans in the European Union, along with their French peers, but they have classified a relatively small portion of those loans as non-performing. Recently, however, that share has been rising while it declined in several other countries.
“This is definitely not just a US problem,” said Valeriya Dinger, a professor of economics at Germany’s University of Osnabrueck. “I wouldn’t be surprised if we see a wave of loan loss provisions for German banks on their domestic commercial real estate exposure,” she said, even if there’s no systemic risk.
German property values are particularly vulnerable to higher borrowing costs because capitalization rates — or the potential return on a real estate investment — were pushed lower there than in other markets during the cheap money era. That reflected in part the fact that yields on German government bonds, a benchmark for investors, were negative at the time.
Lemme guess... all off sudden Commercial Real Estate is vital to the US economy and cannot be left to be decided by market forces...
I'm also going to go out on a limb and bet that a lot of CNBC personalities are soon going to be getting increasingly angry over nothing being done to address this.
No bailouts! This is capitalism at work. Inefficient and weak companies fail. Low rates stifled innovation and allowed people with cash to continual purchase and inflate prices.
The only "bailout" will be emergency cuts to interest rates and expanded fiscal policy (Q.E.) Still a bailout, in all but name.
If one of the big five banks teeters, then there will be a real bailout.
@SomberKoalaSocialist2mos2MO
Bailouts are a guarantee after the Great Recession - going forward, the large donor class will have their gains privatized, and their losses nationalized. Just look at the ludicrous bail out of Silicon Valley Bank as a recent example.
Why do you think large banks and the private equity ghouls would take such outrageous risks for such low coupons? It is risk free.
@SolidPolentaRepublican2mos2MO
It's not a question of "will there be bailouts," but instead "who will get the bailouts?" Will it be the building owners, or will it be the banks who made the loans?
I believe you could make a rational argument that the issues that caused the commercial real estate devaluation and credit shortage were both caused by the federal government to some extent. Buildings lost value when the government mandated remote work which emptied the buildings, which killed the retail and restaurant operators who depended on these workers. Private enterprise did not crash that model?… Read more
Likewise, the banks have had to deal with new liquidity requirements and a cost of funds increase they did not create.
@LovesickCraneSocialist2mos2MO
The only thing that is allowed to fail today are mom and pop businesses. Everything else is bailout eligible, especially if you can check a certain box that makes you extra special.
@CowHarperUnity2mos2MO
The major problem here is the assumption that big office buildings are worth a lot. Since the pandemic, folks simply do not want to commute. Commuting is expensive, a waste of time, and generally sucks big time. A total life draining drag. Now, those who have for more than a century, feasted on dense human concentration now find the humans no longer want to be densely concentrated. Technology has disrupted that scenario. Owners of these concentration facilities have not yet figured that out. Look out below for office property values (and the holders of those loans).
@DirectSophieLibertarian2mos2MO
I'm sure owners of hitching posts felt their improvement to the land was valuable, look at all those places to tie up horses!! Unfortunately, the world had moved on, and all the improvement costs they spent, if anything, reduced the value of the property for it's new highest/best use, as a parking lot for automobiles.
@FreedomRobPatriot2mos2MO
Step 1. Bill Ackman: "HELL IS COMING"
Step 2. Fed Creates new acronym and bails out all institutional holders of CRE debt
Step 3. Janet Yellen to Americans: Our nation will collapse unless Taxpayers = bagholders
I say let the folks at the top lose like they were supposed to in 2008. And then every year since. The can has been kicked too many times.
@PandaSamanthaLibertarian2mos2MO
Will people vote to make this possible even?
It’s no coincidence that all ten of the top ten American cities with the worst ‘doom loops’ are cities where the population have elected a specific form of governance, with resultant massive spikes in every crime statistic, unreported crimes by merchants, pillaging of retail by unpunished criminals, the active destruction of law enforcement, the resultant inability to staff adequate levels of police & fire & other first responders, the creation of laws that defy federal immigration enforcement laws, and social welfare policies & programs that foment drug addiction, homelessness, and the worst public schools in the nation.
Doom loop, indeed. Folks get what they vote for.
@C0al1tionBoaRepublican2mos2MO
They keep saying over and over we need more police, no we need prosecutors and judges that will put the criminals away and get them off the streets. We need people to wake up and realize social justice is all about power in the few and people be damned. Keep feeding kool aid to people and control the message from the msm and you have ignorant voters.
The problem isn't that interest rates are high, by historical standards they are rather normal, the problem is that for two decades the Fed printed money like drunken sailors -- manifested as ultra-low interest rates -- and we are now, finally, beginning to pay the price!
@YearningP0liticRepublican2mos2MO
Amen. While my kids benefited from sub 3% mortgages, no mortgage should ever be that low. Today should be "normal" rates and high rates north from here. Unlimited free money is a disaster.
@SincerePloverSocialist2mos2MO
Then housing prices need to come down, or salaries need to go up... Thats the issue.
@LeftLeaningJohnRepublican2mos2MO
The loans coming due are at low interest rates - 3% - they must be taken out by loans at 7%-8% - this negative arbitrage is bad in 2024 and worse in 2025.
2. Commercial property prices have dropped due to comparable worry free investments like bonds becoming more appealing
3. Banks can only restructure/write down a certain % of loans before the FDIC takes action and they have restrictions put on them or are shut down. You are looking at almost all commercial loans being refinance every 5 years. So about 40% of all commercial real estate loan...
@XfactorQuailDemocrat2mos2MO
Agreed, also there is a major impact on municipalities due to revenue losses (from devaluation of property as well as cascading losses from dormant assets, not to mention loss of current and future revenue from lost new construction) followed by the impact on municipal bonds.
@LeftLeaningJohnRepublican2mos2MO
How and when the pain hits is not clear. Bank's can avoid disclosure: Extending evergreen loans despite good cash flow, failing to recognize the collateral as insufficient to cover the loan, hiding the extent of the problem in their financial statements; regulators hesitating on requiring management to confront their problems; accounting firms allowing management to explain away problem loans; FDIC changing rules to account for pandemic and interest rate challenges; the FED providing liquidity to banks at an unprecedented level. It was a surprise that SVB and Signature bank imploded quickly, primarily from liquidity issues, but the challenges in the banking industry are extensive and I believe, not well recognized. Many of the points above are being used so that this year or next year may morph to some future date.
@ZealousOryxRepublican2mos2MO
This inevitable problem was foreseeable 3 years ago and companies should have been making moves then to mitigate the downside. I spotted it and I'm no where close to being in the business but the shift away from commercial real estate needs and record low interest rates made it very obvious what was probably going to happen in a few years.
@ISIDEWITH2mos2MO
@ISIDEWITH2mos2MO
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