It’s worth remembering that office-property woes are not just an American phenomenon.
Bloomberg has an update on the situation in Germany:
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.
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.
Note the reference to the effect of a “stumbling” German economy on the office sector.
Europe’s “industrial powerhouse” has entered a rough patch, much of it due to the legacy of the Merkel years. Given a boost by earlier economic reforms introduced by Chancellor Gerhard Schröder and by the way in which the switch from the deutsche mark to the euro represented a concealed devaluation, Germany’s industrial sector at first flourished during the Merkel years, but those happy, complacent days have long since ended. Energy costs have soared since Germany was cut off from its supply of “cheap” Russian gas, and the country’s disastrous Energiewende (much of which consisted of the move to renewables and a renewed phase-out of nuclear energy) has effectively put a floor under German energy prices, albeit one eased by various subsidies. And another Merkel initiative, a deep trading relationship with China, is not looking too good either.
I have written before about the idea that the problems in the office-property market are an example of a gray rhino, a notion defined by Michele Wucker as follows:
A “gray rhino” is a highly probable, high impact yet all too often neglected threat: kin to both the elephant in the room and the improbable and unforeseeable black swan. Gray rhinos are not random surprises, but occur after a series of warnings and visible evidence.
For those wondering, das graue Nashorn is “the gray rhinoceros” in German.
And while we are on the topic of gray rhinos, another may be the partial deindustrialization of Germany.
Credit investors are betting that Germany’s struggles are more than a temporary blip.
Economic stagnation, real estate woes and the highest company distress rate in Europe have left bondholders demanding higher corporate spreads from German firms than they are for the wider euro area. That’s a trend that’s been widening since Russia invaded Ukraine, which sent power prices for the country’s energy-intensive manufacturers soaring.
The bad news is continuing to pile up. After the economy shrank in the final quarter of last year, downbeat early surveys for 2024 signal there’s little respite ahead.
Demand from borrowers for investment in the likes of machinery, factories and technology has fallen, creating a risk that domestic growth is impeded in the longer term as companies focus on getting through the current struggle. And now there’s growing concern about some lenders’ exposure to the shaky US corporate real estate market.
And then there’s the threat that Chinese EV manufacturers may pose to the German auto sector, the core of Germany’s industrial sector.
Sometimes, more than one gray rhino can be in the same room.
And for a third now being sighted in that Teutonic space, we could talk about the ascendancy of the increasingly far-right AfD, currently polling second in Germany’s opinion polls, but that’s a topic for another time.