Analyst: Even with interest rate cuts, the global real estate market still struggles to break free from its predicament

Even as major central banks around the world begin to cut interest rates, the global real estate market is unlikely to see relief after experiencing the sharpest rise in interest rates in a generation, as interest rates are unlikely to return to the near-zero levels that drove prosperity before.

This trillion-dollar industry has flourished over the past decade since the global financial crisis, when monetary costs dropped to zero. However, as major central banks raise borrowing costs, this industry has become one of the biggest victims. Now, from the European Central Bank and the Bank of England to the central banks of Switzerland and Sweden, interest rates have started to fall, reducing borrowing costs, with the Federal Reserve likely to follow suit.

However, industry executives and bankers believe that there is no quick solution for this industry, as previously ultra-low rates led to trillions of dollars flowing into real estate. But now, with bonds and regular savings accounts regaining attractiveness, the industry is currently experiencing a significant outflow of funds.

Andrew Angeli, Global Real Estate Research Director at Zurich Insurance, said, "We have not yet emerged from the predicament." He believes that the industry is unlikely to see a rapid recovery.

The past two years of rate hikes have harmed dozens of companies, including the real estate group Signa in Germany, which owns iconic buildings, leaving behind a pile of unfinished houses and empty skyscrapers. Data from consulting firm Falkensteg shows that since the beginning of 2022, the number of real estate bankruptcies in Germany has been on the rise, with over 1,100 in the first half of this year. Additionally, the UK construction industry has been the industry with the most bankruptcies for two consecutive years, with around 4,300 bankruptcies in the 12 months leading up to June 2024.

Due to rising borrowing costs and the impact of working from home, the pain in the office sector is particularly severe, but its effects are spreading to a wider real estate market. The German real estate market is already in a slump, and the UK real estate market is also struggling. Moreover, the economic slowdown in many countries, including Germany, has exacerbated market tensions.

Brian Walker, President of Pittsburgh-based real estate company NAI Burns Scalo, said, "I have never worked so hard and felt like I have achieved nothing. Some may say... we may be at the bottom of the office market, but I don't know how you can say that. Currently, ownership of many office buildings has been handed back to the banks."

Cornelius Riese, CEO of DZ Bank, one of Germany's largest real estate lending institutions, stated that it will take three years for the rate hike to take effect across the entire system. He said, "We are already two-thirds into the process where unexpected events may occur."

Real estate investment firm Cushman & Wakefield estimates that the total amount of commercial real estate debt due for repayment globally this year and next will reach $21 trillion. Cushman & Wakefield stated that in the first six months of this year, borrowers obtained nearly one-third of this debt amount through refinancing transactions, but the gap next year could be as high as $570 billion.

Many American investors have returned the keys to office buildings to lenders, much like Brookfield Asset Management returned the Brill Building in New York to the bank. The Brill Building is famous for artists like Neil Diamond, who began their songwriting careers here Moreover, some small banks that invested all their funds during the real estate boom are now facing threats. Rebel Cole, a finance professor at Florida Atlantic University, pointed out that 62 small banks in the United States have massive real estate loans. Cole noted that a few banks are at risk of bankruptcy because they invested in a real estate industry that is essentially paralyzed, while relying on large deposits that could be withdrawn at any time.

David Aviram, co-founder of New York investment firm Maverick Real Estate Partners, said: "There are a large number of loans maturing... next year lending will be significantly reduced." Aviram added that this has forced banks to try to reduce their loan portfolios by selling loans, but several banks have put such transactions on hold, keeping non-performing loans on their books as banks that have not sold loans are only receiving 40% of the face value of the debt.

Currently, selling properties is not easy. Earlier this year, according to sources, a company liquidator reduced the price of an office building in London's Canary Wharf by about £160 million ($209.89 million), or 60%, but the deal still fell through.

Some analysts point out that banks are unwilling to accept this reality. European regulatory authorities suspect that banks may be covering up the poor loan conditions in the banking industry by ignoring price declines.

However, waiting may make the problem worse. The gap between buildings in prime locations and less desirable locations is widening. Jeffrey Williams, an investor at Schroder Capital in New York, said in Los Angeles, the Century City commercial district around Fox Studios is doing well, while the downtown area is "completely a train wreck," with many bankrupt buildings and vast empty spaces.

Nevertheless, rate cuts have brought hope. In Sweden, one of the countries most affected by the real estate collapse, Leiv Synnes, CEO of SBB, a real estate company that was previously in a commercial real estate crisis in the country, said: "If you believe that the cost of capital will decrease, real estate prices may rise, which is good. The sentiment... is completely different now."