Investing.com - Rising inflation forced central banks around the world to raise interest rates immensely. It was clear that this would not remain without consequences, and so it became apparent as early as the beginning of 2023 that the real estate sector was likely to run into difficulties.
In the months that followed, data showed that prices fell and stress increased for regional banks with large real estate portfolios.
In the US, demand for high-rise office buildings has already collapsed to such an extent that distressed sales have taken place in some areas with discounts of up to 70 per cent. But it could get much worse, because so far there is no light at the end of the tunnel.
Billionaire Barry Sternlicht spoke of a "category 5 hurricane" sweeping over the real estate market. And Sternlicht knows exactly what he is talking about, because he is directly affected by the crisis.
One of his companies, Starwood Capital Group, recently defaulted on a $212.4 million mortgage. He also reported that banks are no longer willing to make new loans for commercial real estate.
Former Boston Fed chief executive John Fish told Bloomberg that the problem is that no one in the market really knows what a realistic market price is anymore and where a bottom might be:
"We don't know what prices to put because there are hardly any assets trading anymore. No one has any idea where the bottom is".
The difficulty is not only that the cost of capital for real estate has more than doubled with the Fed interest rate hikes, but vacancy rates are also increasing. According to Sternlicht, the latter is purely a US phenomenon, as vacancy rates here are between 45 and 60 per cent, depending on the region. In Germany, the figure is less than 5 per cent, and offices in Asia and the Middle East are also well filled.
The vacancy rate of office space should not be seen in isolation, because where no one is working, the retail shops in the city centres are missing up to 20 percent of walk-in customers, which leads to further closures. In addition, people who no longer work in high-rise office buildings prefer to move out of the city because the travel distances are no longer an issue.
All this will be felt by the regional banks, 400 to 500 of which will go bankrupt in Sternlicht's view.
Their downfall is that this year and next year they will have to refinance commercial mortgages worth 800 billion dollars, which the mortgage holders will no longer be able to afford. The entire industry is threatened with disaster, because the office towers are no more needed than the land on which they stand. According to Sternlicht, these can only be used for green spaces, which beautify the inner cities but do not yield any returns.
This means that the USA is facing very turbulent times, because 70 percent of the cities' tax revenues come from the real estate sector, as John Fish explains. If there are distortions here, spending will have to be cut rapidly. Fish points to the example of firefighters, police officers and teachers who are threatened with dismissal - which would have a significant impact on public life.
China faces a similar, if not much bigger, problem. The Chinese real estate market, considered the world's largest asset, is struggling with falling demand.
Yet real estate developers and sellers cannot adjust prices downwards because this is prevented by law, as the political leadership is aware of the immense contagion risk to the entire country. Although President Xi Jinping likes to declare that housing is a livelihood and not a speculative commodity, property prices have risen rapidly.
The measures taken so far to support mortgage lending have not had the desired effect. The Politburo has now announced that the challenges facing the sector are to be tackled more intensively. Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd, said:
"It seems that the government has realised the importance of a policy change in the sector to stabilise the economy."
In response, China's beleaguered property sector rallied on Tuesday, but without sustained action, the stabilising effects of the policy commitments will quickly fizzle out.
(Translated from German using DeepL)