When bank deposits barely produced any yields, commercial real estate became a haven for investors looking for a sure income. Then central banks raised interest rates, and many properties suddenly looked like bad investments. The problem was exacerbated by the decline in demand for large, centralized workplaces and retail spaces due to the rise in remote work and online shopping. Valuations plummeted, making it harder for landlords to refinance maturing loans secured by the property without violating their terms. One alternative was to sell, but the prices offered often did not cover the outstanding debt. By early 2024, banks caught in the real estate slump had piled up billions of dollars to cover bad loans.
The crisis has been a slow decline over many months, because most real estate is private and valuations can take years to adjust to changes in demand. The MSCI World Real Estate Index fell 18% from the beginning of 2022 to the end of 2023, a sign that equity investors are anticipating the direction of real estate prices. Consulting firm Newmark Group said in August that about $1.2 trillion in U.S. commercial real estate debt is “potentially in trouble” because of the price slump. Vacancy rates in office buildings in major U.S. cities hit record highs, and landlords have pulled out of some properties that were worth less than the debt and handed them over to lenders. U.S. regional lenders are particularly vulnerable and will be hit harder than their larger peers because they did not have the large credit card portfolios or investment banking operations to protect them. In Europe, cracks are starting to show as Rene Benko's Cigna Group corporate network collapses, threatening to hit dozens of lenders with credit losses. Some Asian banks are also feeling the pain, with Japan's Aozora Bank warning investors it will post its first loss in 15 years due to bad loans linked to U.S. real estate.