The global real estate markets, shaken by the most significant increase in interest rates in a generation, are unlikely to find much relief from the gradual reduction in borrowing costs, with little expectation of a return to the era of easy money that previously spurred a boom.

This multi-trillion dollar sector, which flourished in the decade following the global financial crisis when interest rates were slashed to zero, has become one of the most affected as central banks have raised borrowing costs.

Currently, central banks—including the European Central Bank, the Bank of England, and those in Switzerland and Sweden—are lowering rates, making borrowing more affordable, with the US Federal Reserve expected to follow suit.

However, industry leaders and bankers do not foresee a swift resolution for a sector that thrived on historically low rates, which attracted trillions into real estate, funds that are now being lost as bonds and traditional savings accounts regain their attractiveness.

"We're not out of the woods yet," stated Andrew Angeli, global head of real estate research at Zurich Insurance, a Swiss investment firm, suggesting that a quick recovery for the sector is unlikely.

The past two years of interest rate increases have resulted in numerous casualties, including the property group Signa, which owned prestigious buildings in Germany, leaving behind a legacy of unfinished homes and vacant skyscrapers.

According to consultants Falkensteg, property insolvencies in Germany have been on the rise since early 2022, surpassing 1,100 in the first half of this year.

Britain’s construction industry has experienced the highest number of insolvencies of any sector for two consecutive years, with approximately 4,300 recorded over the 12 months leading to June 2024.

The distress is particularly severe for office spaces, adversely affected by increased borrowing costs and the shift to remote work, but the repercussions are also impacting the extensive housing market, which has declined in Germany and faced challenges in Britain.

"I've never worked so hard in my life and feel like I have nothing to show for it," remarked Brian Walker, president of the Pittsburgh-based property firm NAI Burns Scalo.

"Some may argue that we are nearing the lowest point of the office market, but I find it difficult to support that claim," stated Walker. "We are witnessing a significant number of office buildings being returned to the banks."

Cornelius Riese, CEO of DZ Bank, one of Germany's largest property lenders, noted that it would take approximately three years for the impact of higher interest rates to fully manifest. "We are nearly two-thirds through the period where unexpected developments may arise," he remarked.

An economic downturn affecting several countries, including Germany and China, is contributing to the prevailing uncertainty.

High stakes

According to real estate investment firm JLL, approximately $2.1 trillion in commercial real estate debt worldwide is due for repayment this year and next. In the first half of this year, borrowers managed to secure refinancing for nearly one-third of that amount, but JLL warns of a potential shortfall of up to $570 billion next year.

Numerous investors in the United States have returned the keys to their office properties to lenders, as exemplified by Brookfield Asset Management's decision regarding New York's iconic Brill Building, which gained fame through artists like Neil Diamond, who began their careers there. Brookfield has not yet responded to requests for comment.

Several smaller banks, which heavily invested during the property boom, now face significant risks.

Rebel Cole, a finance professor at Florida Atlantic University, has identified 62 smaller U.S. banks with disproportionately large property loans.

Cole has pinpointed a limited number of lenders that are at risk of insolvency due to their investments in the largely stagnant property market, while depending on funding from substantial deposits that could be withdrawn at any time.

"There is a significant volume of loan maturities approaching next year," stated David Aviram, co-founder of Maverick Real Estate Partners, a New York-based investment firm.

This situation is pressuring banks to divest loans by attempting to sell them; however, several banks, offered as little as 40% of the loans' face value, have opted to postpone such transactions, choosing instead to retain the distressed credit on their balance sheets, according to Aviram.

The sale of properties is equally challenging.

Earlier this year, a liquidator reduced the price of an office tower in London's Canary Wharf by approximately £160 million ($209.89 million), or 60%, from its previous purchase price, according to a source familiar with the situation, yet the sale ultimately fell through.

Some analysts believe that banks are in denial about the situation. European regulators suspect that they may be concealing the deteriorating condition of loans in the sector by disregarding declining prices.

However, delaying action could exacerbate the issue. A growing divide is emerging between properties in desirable locations and those that are less favored.

In Los Angeles, the Century City commercial area surrounding Fox Studios is thriving, while large portions of downtown are described as a "total train wreck," with numerous buildings failing and significant amounts of space remaining vacant, noted Jeffrey Williams, an investor at Schroders Capital based in New York.

In Sweden, which has been severely impacted by the property downturn, a recent rate cut is nonetheless providing a glimmer of hope.

"It is more encouraging if you believe that capital costs will remain low and property values may potentially increase," remarked Leiv Synnes, CEO of SBB, one of the largest distressed groups in the country. "The sentiment has changed dramatically now."