Global property markets, rattled by the steepest rise in interest rates in a generation, will get little relief from the gradual easing of borrowing costs, with scant hope of a return to the free money that fuelled a boom.
The multi-trillion dollar industry, which thrived in the decade after the global financial crisis when the cost of money was cut to zero, has been one of the biggest casualties as central banks pushed up borrowing costs.
Now central banks, from the European Central Bank and Bank of England to Switzerland and Sweden, are cutting rates, making it cheaper to borrow, with the U.S. Federal Reserve to follow.
But industry executives and bankers see no quick fix for an industry built as rock bottom rates sent trillions flowing into property, money the sector is now haemorrhaging as bonds and ordinary savings accounts regain their appeal.
"We're not out of the woods yet," said Andrew Angeli, global head of real estate research at Zurich Insurance, a Swiss investor, arguing the sector was unlikely to see a rapid recovery.
The past two years of rate hikes have claimed scores of victims, including property group Signa, which owned trophy buildings in Germany, leaving behind a trail of half-built homes and empty skyscrapers.
Property insolvencies in Germany have been rising since early 2022, according to consultants Falkensteg, to reach more than 1,100 in the first six months of this year.
Britain’s construction sector has seen the most insolvencies of any industry for two years running, with roughly 4,300 over the 12 months to June 2024.
The pain is acute for offices, hammered by rising borrowing costs and home working, but the impact is spilling over into the vast housing market, which has sunk in Germany and stuttered in Britain.
"I've never worked so hard in my life and feel like I have nothing to show for it," said Brian Walker, president of the Pittsburgh-based property company NAI Burns Scalo.
"Some will say ... we're probably at the bottom of where the office market is, but I don't know how you can say that," said Walker. "You're starting to see a lot of office buildings keys just go back to the bank."
Cornelius Riese, the CEO of DZ Bank, one of Germany's biggest property lenders, said higher rates would take three years to work their way through the system. "We're almost two thirds of the way into the phase in which surprises can crop up," he said.
An economic slowdown in many countries, including Germany and China, is adding to the jitters.
HIGH STAKES
Real estate investment firm JLL estimates that a total $2.1 trillion worth of commercial real estate debt globally will need to be repaid this and next year. Borrowers secured refinancing deals to cover almost one third of that in the first six months of this year, but there could be a shortfall next year of up to $570 billion, JLL said.
Many U.S. investors have handed back the keys to office blocks to lenders, as Brookfield Asset Management did with New York's Brill Building, a landmark made famous by singers such as Neil Diamond, who began their careers as songwriters there. Brookfield did not immediately return a request for comment.
Some small banks, who went all in as property boomed, are now under threat.
Rebel Cole, a professor of finance at Florida Atlantic University, has identified 62 smaller U.S. banks with outsized property loans.
Cole identified a small number of lenders at risk of going bust as they have investments in the largely paralysed property sector, while relying on funding from big deposits that could be pulled at a moment's notice.
"There's a vast amount of maturities ... on loans going to come down the pike next year," said David Aviram, co-founder of Maverick Real Estate Partners, a New York-based investor.
That is pressuring banks to offload loans by trying to sell them but several, who were offered as little as 40% of the debt's face value, shelved such deals, parking the soured credit on their books instead, said Aviram.
Selling buildings is not easier.
Earlier this year, a company liquidator knocked around 160 million pounds ($209.89 million), or 60%, off the previous purchase price of an office tower in London's Canary Wharf, a source familiar with the matter said, but the sale foundered regardless.
Some believe banks are in denial. European regulators suspect they may be masking the poor state of loans to the sector by ignoring price falls.
Waiting, however, could make the problem worse. A widening chasm is opening between buildings in sought-after locations and those out of favour.
In Los Angeles, the Century City commercial district surrounding Fox Studios is doing well, while large swathes of downtown are a "total train wreck", with many buildings going bust and much space unoccupied, said Jeffrey Williams, a New York-based investor at Schroders Capital.
In Sweden, one of the worst affected by the property rout, a rate cut is nonetheless giving hope.
"It is nicer if you ... believe that there will be low capital costs and property prices will possibly rise," said Leiv Synnes, CEO of SBB, one of its largest troubled groups. "The mood ... is completely different now."
($1 = 0.7623 pounds)
