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Germany’s Office Property Slump Accelerates With Record Drop

Germany’s Office Property Slump Accelerates With Record Drop

(Bloomberg) -- Germany’s market for office buildings suffered its sharpest drop in two decades as higher financing costs and sluggish return-to-office trends soured investor appetite.

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The downturn accelerated in the fourth quarter with a 13% drop from the previous year, according to data published Monday by German banking association VDP. For the full year, prices slumped more than 10%, the most since records began in 2003, and the outlook is for further declines at the start of 2024.

The crisis in real estate is hitting offices harder than homes, said Jens Tolckmitt, VDP’s managing director. As Germany’s economy stumbles and uncertainty about workers fully returning to office mounts, “demand for offices remains subdued,” he added.

The troubles in the commercial real estate market are threatening to plunge some banks into crisis. Concerns about exposure to the sector are rising, and German lenders in particular are under increasing investor scrutiny.

Commercial real estate in Europe’s largest economy is experiencing an “adjustment period” but is “stable as a whole,” German Finance Minister Christian Lindner said in a Bloomberg TV interview on Monday.

“Many companies are worried and have to correct their expectations,” he said.

Read More: Rising Distress in Germany Signals a Lot More Struggles Ahead

Deutsche Pfandbriefbank AG — one of the German lenders whose commercial real estate exposure raised investor alarm bells — witnessed its stock dropping to an all-time low on Friday.

Earlier last week, Deutsche PBB said it had raised provisions to cover potential losses due to weakness in commercial real estate markets. In a bid to calm markets, it emphasized that its funding needs for the year were already largely covered.

With potential office buyers still demanding steeper discounts than most sellers are prepared to offer, German commercial real estate is likely to remain weak, according to VDP’s Tolckmitt.

“At the beginning of 2024, the market is still in a downturn, with prices continuing to fall,” he said.

--With assistance from Nicholas Comfort and Francine Lacqua.

(Updates with Lindner comments beginning in 5th paragraph)

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