The vacancy rate for office space in the US has reached 20%. Similar high values were only achieved in the wake and aftermath of the Savings and Loan crisis 35 years ago. Increasing vacancies lead to falling rents, and this could lead to increasing pressure on equity and debt investors from home and abroad, because the rising interest rates had already eroded capital values via the discount factor, i.e. higher rental yields. This raises several questions: Firstly, have valuations bottomed out now that the interest rate turnaround could be imminent? Secondly, will similar developments also be expected for Germany? Thirdly, a new financial crisis is now imminent, this time triggered not by the housing but by the commercial real estate markets; after all, many US retail real estate markets have already been strained in recent years?
The stress factors are quickly identified, and they are proving to be more persistent than many had hoped. Inflation has not yet been finally defeated, which is why the interest rate turnaround is being delayed. The capital markets are no longer pricing in such dramatic downward movements as they were at the end of 2023. However, the yield curve is still inverted in the USA, which means that long-term interest rates are below short-term interest rates. Real estate market players often see this as positive, as it reflects falling interest rates. But the flip side of the coin is that this scenario is most likely if the US economy slides into recession. Inverted yield curves have historically been a reliable leading indicator of economic downturns, and this would weigh on labor markets and consequently commercial real estate occupancies.
The second important factor is that work-from-home (WFH) has stubbornly carved its way into working life. The expensive office centers on the coasts are particularly affected by this, and previous attempts to lure employees back to the office (RTO – Return-to-Office) seem rather helpless. In fact, there is so far more empirical evidence that RTO does not increase company profitability, but does reduce employee motivation because they feel like scapegoats for poor company figures. At least this is what a recent study by Ding and Ma (2023) suggests. It is far too early to judge all of this conclusively, but there is much to suggest that the sprawling and large metropolitan areas in particular will be burdened with a settlement structure with a strong division of labor. US city centers are likely to develop more in the direction of classically mixed European cities in the next few years, a response that is also pending in Europe (see the articles in Just and Plößl, 2021).
For German cities, this could mean that the shock waves will be flatter because the suffering of commuting is less severe and the cities are better mixed. But even in Germany, the pre-pandemic office usage rates will probably not be reached in the foreseeable future. Our office landscapes are not sufficiently attractive, and the labor market pressure is apparently not enough to draw a hard RTO line. Such a line is simply not helpful, as Ding and Ma argue.
But back to the USA: It is arguable how likely a recession is in this election year – the investment package that has been put together in the USA for industry and infrastructure is too large, and the incumbent president has too much experience to understand the significance of it to ignore economic strength in an election year (incumbent presidents have always been able to prevail since World War II when the economy was not in recession). But Bidenomics only counteracts the power of interest rates and structural shifts in other areas – the focus is not on saving office jobs.
In my opinion, it is inappropriate to conjure up the next financial crisis – triggered by the commercial real estate markets – for two important reasons: Firstly, developments are remarkably poor, especially in the office real estate markets in the large metropolitan areas on the coast. They do not affect all commercial properties in the country. The price declines in commercial real estate for the USA are still manageable.
And that is why so far there have only been small fluctuations in loan defaults on commercial real estate loans.
Of course, this is a lagging indicator and it can be expected that this curve will continue to point upwards in the next few months, but the stability is not only due to the time lag, but also because financial market regulation is still reflecting the financial crisis from before 15 years in the paragraphs, and that is the second important reason for the fundamentally cautiously positive outlook: the banks have to finance more carefully and are doing so. This applies equally to US and European banks. In this respect, the feared infection in Europe will be smaller than 15 years ago. It is expected that the securitization of commercial real estate loans – especially if they are backed by office properties – will be more frequent in the next few years than in previous years (Hopcroft, 2024), but CMBS (Commercial Mortgage Backed Securities) do not have this is no longer as important as it was before the financial crisis; here too, capital market players and their regulators have learned that a lack of transparency has to come at a price.
Overall, the environment is still tense, but less dramatic than the focus on a few data points would suggest, and the fact that fewer banks have recently reported tightened credit standards at least shows that banks also seem to be differentiating in their assessment. So that the following graphic is not immediately seen as an upswing signal, it should be emphasized that the graphic reflects a self-assessment of the banks and that this does not seem to be the beginning of a general weakening of standards, but rather just an end to the further comprehensive tightening. Anyway.
In uncertain market phases, the data situation can change quickly, so this point of view can only represent a point in time analysis that shows that, despite all the stress factors, there is not yet much to suggest a repeat of the financial crisis, but there is evidence of continued pressure on selected commercial real estate markets. The views are neither gloomy black nor brilliantly bright, but rather like a pepita pattern, there are light and dark areas at the same time. This is not the worst of all worlds for opportunistic and well-educated investors because there will be selection. Conversely, this also means that not everyone will survive this selection process, and the banks have to manage this.
For further reading:
Ding, Y., Ma, M. (2023). Return-to-Office Mandates. Available at SSRN: or Zugriff:
19.02.2024.
Hopcroft, H. (2024). The 10 most important charts in US real estate. In Property breaking latest news 12.02.2024. Zugriff 19.02.2024.
Just, T., Plößl., F. (2021). The European city after Corona. Strategies for resilient cities and real estate. SpringrGabler. Wiesbaden.
A notice: The article appeared on February 19, 2024 as Position 130 the IREBS Real Estate Academy.
IREBS Real Estate Academy and University of Regensburg.