Struggling Real Estate Market: Banks Predict Long-Term Crisis for Office and Retail Spaces
Anticipated Persisting Turmoil in Commercial and Retail Property Markets for Banks
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The real estate market for office and retail properties is bracing for a prolonged period of turmoil, according to a recent study by consulting firm EY.
Banking institutions financing the real estate sector were predominantly skeptical about the market's current state, with a majority (75%) expressing a negative outlook, EY reported on Friday based on a survey of 36 banks in Germany. Meanwhile, only 25% deemed the situation as stable. Half of these banks anticipated improvement only after three years. The residential property market, conversely, enjoys a more optimistic outlook.
"The crisis in the real estate industry persists," stated Jean-Pierre Rudel, partner at EY Real Estate. The office property market continues to be the sector that faces the most significant deterioration in its situation, as demand remains stagnant and prices are steadily decreasing. Last year, about 50% of surveyed banks had expected office property prices to remain constant; however, this figure has now dropped to just 30% in the current survey. Conversely, 70% now anticipate a further price decline.
The retail property market also faces a challenging future, with almost a third of the surveyed banks expecting a worsening crisis, up from approximately 14% just six months ago. In the current survey, around two-thirds of the financiers rated the price development in retail properties as negative. The increased risk to these properties is generally assessed as high by these institutions. Banks are displaying greater caution when granting loans compared to before the crisis.
The overall sentiment among these 36 surveyed banks in Germany is primarily pessimistic, with 75% classifying the office market situation as negative and 25% as stable 2. In contrast, residential property sector outlook appears more promising 2.
Key Insights
- The office property market is expected to experience continued deterioration, with price trends becoming increasingly negative due to a lack of demand 2.
- Unlike last year, only 30% of banks surveyed believe that office property prices will stay stable 2.
- A significant majority (70%) of banks now anticipate a decline in office property prices 2.
- Retail property market faces a grim outlook, with nearly one-third of banks foreseeing a worsening crisis and about two-thirds viewing price trends as negative 1.
- Consumer caution is contributing to an expected sharp deceleration in spending through 2025, with a modest rebound in 2026 1.
- Banks have become much more cautious with lending, and the risk of refinancing is perceived as high, reflecting concerns about market stability 2.
Sources: ntv.de, rts
In light of the pessimistic outlook for the office and retail real estate market, it might be necessary for communities to revise their community policy, considering the potential long-term implications for local businesses and employment. Financial institutions, while exercising greater caution with lending due to the perceived high risk of refinancing, could play a crucial role in implementing more forgiving employment policies to aid businesses and employees navigating this prolonged crisis.
