Back when money in the bank was yielding almost nothing, commercial real estate became a haven for investors in need of reliable returns. Then central banks jacked up interest rates and 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, centralized workplaces and retail spaces. Valuations tanked, making it harder for landlords to refinance maturing loans secured against their properties without breaching the terms. One alternative was to sell out, but the prices on offer often failed to cover the outstanding debt. By early 2024, banks caught up in the property slump were setting aside billions of dollars to cover soured loans.
The crisis has been a slow-motion slide over many months, as most properties are privately held and valuations can take years to adjust to shifts in demand. The MSCI World Real Estate Index fell by 18% between the start of 2022 and the end of 2023, signaling where equity investors believed property values were headed. About $1.2 trillion of US commercial real estate debt was “potentially troubled” because of the slump in prices, advisory firm Newmark Group Inc. said in August. Vacancy rates for office buildings in major US cities hit records and landlords walked away from some properties now worth less than their debt, handing them to their lenders. 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 begun to show as the web of companies in Rene Benko’s Signa Group imploded, threatening credit losses for dozens of lenders. Some Asian banks were also feeling the pain, with Japan’s Aozora Bank Ltd. warning investors it would report its first loss in 15 years because of bad loans tied to US property.
