U.S. commercial property values plunge by 50% prompting crisis spread to Europe, German banks at risk

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1st March 2024 – (Berlin) The German banking institution Aareal Bank is facing challenges after revealing that a significant portion of its €4 billion loan portfolio for American commercial properties might become irrecoverable. As the US office market experiences a downturn, with property values halving, concerns are growing over the potential impact on the wider European financial sector, and the risks to German banks are becoming more pronounced.

On Thursday, Jochen Kloesges, the Chief Executive of Aareal Bank, conveyed the bank’s precarious position, noting that approximately 25 per cent of its U.S. office property loans, valued at around €1 billion, could default due to the current market instability. Kloesges expressed a bleak outlook on the market’s recovery, suggesting that the prospects do not appear promising.

The bank, which stands as one of Germany’s principal real estate lenders, had already set aside €441 million last year for bad loans, signalling a peak in provisions that surpassed even those during the height of the COVID-19 pandemic. Aareal has announced plans to reduce exposure by €1 billion by the end of March, emphasizing that it does not require additional capital injections despite the looming crisis.

The ripple effects of the decline in US office property values have already been felt by banks in New York and Japan and are now extending unease to European investors. Kloesges predicts persistent volatility in the U.S. office space market for an extended period.

Aareal Bank, with a loan market share of about 7 per cent in Germany and a global reach that includes roughly 25 per cent of its business in the United States, from New York to San Francisco, is now navigating through these challenging market conditions.