Commercial real estate crisis ripples across the world

Commercial real estate markets have been in a sharp decline across the world as the spike in interest rates compounded challenges from the shift to work-from-home and changing retail behaviour.
Back when money in the bank was yielding almost nothing, commercial real estate became a haven for investors in need of reliable returns. As central banks jacked up interest rates, a lot of properties suddenly looked like poor investments.
The troubles were compounded by the rise of home working and online shopping, which sapped demand for big, centralised workplaces and retail spaces.
The MSCI World Real Estate Index fell by 18% between the start of 2022 and the end of 2023, signalling where equity investors believed property values were headed.
About $1.2tn of US commercial real estate debt was “potentially troubled” because of the slump in prices, advisory firm Newmark Group said in August.
US regional lenders were particularly exposed, and stood to be hurt harder than their larger peers, because they lacked the large credit card portfolios or investment banking businesses that could insulate them.
In Europe cracks began to show as the web of companies in Signa Group imploded, threatening credit losses for dozens of lenders.
Some Asian banks were also feeling the pain, with Japan’s Aozora Bank warning investors it would report its first loss in 15 years because of bad loans tied to US property.
The depressed prices make it harder for the industry to refinance the $2.2tn of US and European commercial property loans due to mature by the end of 2025, according to a Bloomberg report.
Office buildings were the biggest casualties as post-Covid changes in working patterns and poor energy efficiency combined with rising interest rates to crush values.
Rising interest rates had a bigger impact on Europe’s property prices as yields there were lower than in the US when central banks began their hiking cycle. However, valuations in the US fell further as it had a larger stock of new and empty buildings.
At the end of the third quarter of 2023, more than a fifth of office space lay empty in several major US cities.
The European Central Bank is concerned that banks in the region have been too slow to mark down the value of loans and the UK’s Financial Conduct Authority is to review valuations in private markets, including real estate.
Also, a new batch of overseas assets acquired in a decade-long Chinese expansion spree are starting to hit the market as landlords and developers decide they want cash now to shore up domestic operations and pay off debts — even if that means taking a financial hit.
There are some green shoots of hope, though.
But Recovery is expected to be patchy, with investors predicted to favour Europe over the US.
Capital Economics, the research consultancy, forecasts that values of commercial buildings in the UK will rise 1.1% this year after dropping 4% in 2023.
Eurozone real estate prices should turn positive in 2025, Capital Economics forecasts, while the US will lag substantially with a 10% drop this year and no recovery until 2026.
Completed commercial property deals globally sank to the lowest level in a decade last year, with owners unwilling to sell buildings at steep discounts, according to Bloomberg.
The worldwide slump triggered by borrowing-cost hikes has already wiped more than $1tn off office property values alone, according to some estimates.
But the total damage is still unknown because so few assets have been sold, leaving appraisers with little recent data to go on.