Falling commercial real estate prices: signals of a new financial crisis?

The market for commercial real estate is in crisis. Prices for many buildings are in free fall. This brings back memories of the financial crisis of 2008/2009.

When people talk about difficulties in the real estate market, bad memories come back to many people. In 2008/2009, problems on the US real estate market triggered a global financial crisis. Now the industry is in crisis again. This time it’s about commercial real estate.

The main reasons are the changing use of real estate and rising interest rates. “This has meant that hardly any buyers are willing to buy larger commercial properties,” says Chris-Oliver Schickentanz from Capitell AG.

And what should not be underestimated is that there is a rethinking of how buildings are used. “Large office space, like the one we needed before Corona, is no longer needed due to the increasing use of home offices.” The situation is particularly dramatic in the USA. According to estimates, almost every third office building in metropolitan areas is empty. And that means that the prices for office properties are literally collapsing.

German banks are also noticing the consequences

Even if what is happening in the USA is far away from our perspective, the consequences can now also be felt here. The Deutsche Pfandbriefbank is particularly affected in Germany. This is a credit institution that specializes in financing commercial real estate. At other large German banks whose activities are more broadly based – such as Deutsche Bank – the effects are not quite as dramatic.

Is this the beginning of a new financial or banking crisis? Analyst Schickentanz doesn’t see it that way. That may be the case in parts of the banking sector, he says. “This is particularly true for the US regional banks, where the crisis, which had already flared up violently in March last year, is actually not yet over.” And it affects institutions like Deutsche Pfandbriefbank, which have a very one-sided business model.

But it doesn’t affect the banking industry as a whole, because the credit institutions have done their homework in recent years. You have a significantly larger capital buffer than was the case around 15 years ago.