Deutsche Bank’s CEO, Christian Sewing, anticipates a continuation of the commercial real estate market crisis this year. In the USA, Moody’s has downgraded the rating of regional New York Community Bancorp to “junk” status due to its troubles in the commercial real estate market. “Concerns about the condition of commercial properties are not new, but are now starting to affect only selected banking entities,” says Dr. Jan Gąsiorowski from the Warsaw office of Wolf Theiss.
Pessimistic news regarding commercial real estate and the banking sector is particularly coming from the USA. In March, the Bank Term Funding Program (BTFP), which was a vital support tool for the American banking system, ended. It was launched in response to the collapses of Signature, Silvergate, and Silicon Valley Banks. Regional banks, including New York Community Bancorp, have been particularly pressured. Troubles may also affect Japan’s Aozora Bank and Germany’s Deutsche Pfandbriefbank, both involved in the American commercial real estate sector.
In simple terms, this is a result of the highest interest rate hike in the United States in 23 years, but also structurally – due to the lack of return to offices after the pandemic and the widespread adoption of remote work models. Consequently, even such dire predictions as foreseeing the biggest real estate market crisis since the financial crash of 2008 have emerged. On the other hand, some analysts are more positive – a perspective we tend to agree with from the standpoint of European assets, mentions Dr. Jan Gąsiorowski from Wolf Theiss.
Playing the role of Cassandra, for instance, is Fitch, which expects the non-performing loan ratio to rise above the peak reached after the global financial crisis in 2008. According to the agency, this ratio will increase from 3.6% this year to 9.9% by 2025. Falling property values and rising financing costs are expected to stimulate negotiations regarding the extension of loan maturities. There is much at stake, as analysts from Goldman Sachs forecast a cumulative repayment of $2.2 billion in the USA by 2027 due to this.
As reported by international media – analysts from The Conversation believe that the closure of the BTFP does not necessarily have to lead to troubles for regional banks in the USA, as they had enough time to adjust to higher interest rates. Other Federal Reserve tools, such as the so-called discount window, are also available to them.
The development of this situation in this country is obviously important for the global banking sector and the global commercial real estate market. However, from the perspective of Central and Eastern Europe, it is difficult for us to accept a scenario even close to that of 2008. In Poland, there is talk of a decrease in the average size of leasing transactions in the office sector by 20-30%. However, it is noticeable that companies are more eager to secure office space for longer periods, or undertake actions related to cost optimization. Developers are also adjusting their activity and suspending projects, which helps maintain a relatively low level of vacancies. Therefore, the condition of the industry is relatively good, and we cannot compare it to that in the USA. What might be concerning is the noticeably lower activity in the commercial sector, which has remained at a very low level across the entire commercial sector. In recent weeks, the situation in the German market also casts a shadow on the optimistic approach, which could be significantly more dangerous for us than the situation in the USA, notes Dr. Jan Gąsiorowski.
According to Reuters, in the last quarter of 2023, commercial property prices in Germany fell by 12.1% year-on-year, the sharpest drop in history. For several months, there have also been reports of troubles facing Europe’s real estate giant – the Signa Group, which announced the bankruptcy of its key companies with liabilities estimated at 13 billion euros.
In the media, there are headlines about a creeping crash in the commercial real estate market in Germany, but looking at the numbers – these are voices not yet reflected in the facts. Of course, it must be admitted that German banks have the most commercial real estate loans in the European Union, yet only a small portion of them are at risk. Also, the scale of engagement and market size compared even to the residential sector is incomparable, reassures Dr. Jan Gąsiorowski.
However, what impact will this international situation have on the commercial real estate market in Poland, where investment market activity reached its lowest level since 2009 last year? The transaction volume in our market was about 2 billion euros, with a large share of warehouse space. Drops also affected the entire region, reaching from 27% in the Czech Republic to even 60% in Romania. In Poland, the total investment volume in 2023 was only 33% of the 2022 result.
However, as market analysts emphasize, since the beginning of this year, we have observed an increase in transactional activity, which is a very large field for optimism in the coming quarters.
A revival in the transactional market in commercial real estate depends primarily on the stabilization of prices and cheaper money. A decrease in interest rates would certainly help find a balance level for buying and selling offers, but it will not cause an increase in investor activity in the face of global concerns related to increased risk along the line of banks – the commercial real estate market. A possible solution – increasingly discussed by the banking sector – could be the activation of domestic capital. Exaggerated requirements related to financing new projects will limit the implementation of speculative investments. Paradoxically – the effect of the crisis in the banking and commercial real estate markets in Poland could therefore be an acceleration of work on solutions supporting so-called Real Estate Investment Trust (REIT) funds, which would allow a greater extent of investment by individual and institutional investors in commercial real estate, concludes Dr. Jan Gąsiorowski.
In the Czech Republic, domestic investors have a 60% share in the commercial real estate market. In Poland, this percentage is only 2%. This could change with the introduction of regulations concerning funds that allow individual investments in commercial real estate, which guarantee a share in the rents paid by tenants.
