It’s the little things that bring back bad memories, such as the quietness with which the crash occurs or the cryptic letter abbreviations that suddenly start circulating. In 2008, at the beginning of the global financial crisis, it was previously little-known banking products such as subprime real estate loans and risky financial products such as CDO and CDS that suddenly plunged financial institutions around the world into dire straits. Today, an abbreviation is making the rounds again that has so far led a shadowy existence, the finance ministers of the seven leading industrial nations (G7) but has put him on alert. It is CRE and stands for commercial real estate – or as it is more profanely called in German: commercial real estate.
Commercial real estate includes company property, supermarkets and administrative buildings; the global market has a volume of a hard to imagine 110 trillion euros. Above all, these include office buildings – And exactly here lies the problemwhich is even threefold.
First of all, there are the dramatic rises in key interest rates, which are making investments in the real estate sector more expensive and also dampening the overall economy. This puts a double burden on the demand for office space and can put owners and lending banks in distress. Added to this are the pandemic-related trends towards home offices and online shopping, which have caused many companies to permanently give up office and commercial space. And then finally there is the long unchecked new construction, which has dragged down demand even further due to higher supply. Take New York, for example: Here, the Hudson Yards, an eleven-hectare, completely new business district was created, even though existing buildings such as One World Trade Center have been partially empty for years. The result of all this: prices are falling at a rate that has rarely been seen before.
German office building prices have fallen more sharply than ever before
To make matters worse, on the other side of the globe, China has been struggling with its own home-grown real estate crisis for years, and the wave has long since spread to Europe. This is shown by the latest figures from Germany, where the price decline for office buildings accelerated dramatically in the fourth quarter, falling by 13 percent. For the year as a whole, the value of real estate fell by an average of more than ten percent, more than ever since records began.
Now you might think that politicians don’t care if real estate investors speculate. However, the experience of 2008 shows that loan defaults can cause banks to fail, trigger a crisis of confidence in the entire industry and ultimately plunge the economy into a severe recession. At the time, hundreds of banks in the USA were liquidated, forcibly merged or nationalized; in Germany, the federal government had to support, among others, the then Dax group Hypo Real Estate (HRE) and Commerzbank with tax money amounting to tens of billions.
Politicians are now correspondingly alarmed when it comes to the fall in prices for commercial real estate. It is true that some fears of a crash may be exaggerated, according to G-7 circles. But it is also clear: “We are watching it.” The International Monetary Fund (IMF), which monitors the stability of the world financial system, also warns with urgent words: “The challenges are particularly frightening because high loan volumes will soon have to be refinanced,” says an analysis. In fact, investors in the USA and Europe alone will have to find follow-up financing for commercial real estate loans with an estimated volume of around two trillion euros by the end of 2025. This could cost many borrowers dearly.
From the IMF’s perspective, small and medium-sized regional banks are particularly at risk, as they would have lent five times as much money to CRE investors as the large financial institutions. Those affected include not only American institutes, but also, for example, Japanese institutes – and European ones, especially an old acquaintance: the Deutsche Pfandbriefbank (PBB)formerly part of the now liquidated Hypo Real Estate.
Deutsche Pfandbriefbank is sitting on a risky portfolio
In 2009, the state bank rescue fund Soffin completely took over the viable remnants of HRE and put it back on the stock exchange in 2015. In 2021 he sold his last shares. The Pfandbrief bank, based in Garching near Munich, has been making a name for itself in the financial world for several months now. The bank’s share and bond prices have fallen dramatically and recently highly speculative hedge funds have expanded their bets on further price losses for the financial institution. The management is characterized by a “massive lack of assessment and understanding” in the core business of commercial real estate. the activist fund Petrus Advisers recently saidwho sold his shares on PBB and is now also betting against the institute.
In fact, CEO Andreas Arndt, who has led the bank since 2014, doubled the loan volume for commercial real estate in the USA just after the start of the Corona pandemic – just in time for the start of the home office boom, which has been going on ever since and leaving more and more offices empty . The US commitment of around four billion euros exceeds the lender’s total equity capital of 3.3 billion euros. This means that the bank cannot actually afford high write-downs in this market.
At least PBB continues to make a profit and its capital and liquidity levels are good according to his own statements well above the requirements. With 48 billion euros in total assets, the bank is also just twice as big as Stadtsparkasse München and therefore not too big to fail, i.e. not so big that the state would have to save them in case of doubt in order to prevent further damage to the rest of the economy. Strictly speaking, taxpayers don’t have to worry anyway, because a lot has changed since then Financial crisis: Since then, there have not only been rules on how banks can be wound up without state aid, but also the European Stabilization Fund SRF, which is financed by the industry itself and filled with 78 billion euros. However, the new crisis instruments have not yet been tested on a large scale.
The G-7 states are therefore trying to calm the situation verbally. The European market for commercial real estate is going through an “adjustment phase” but is “stable as a whole,” said the Federal Finance Minister Christian Lindner this week in an interview with the financial news channel Bloomberg TV. But he couldn’t give a complete all-clear either. “Interest rates are much higher than expected, which is why many companies are worried and have to correct their expectations,” said Lindner. He himself is not involved in the supervision of the industry because responsibility for this lies with the European Central Bank. But one thing is clear: “We have to be aware of the situation.”