Against the backdrop of rapid interest rate hikes by the Federal Reserve and major central banks worldwide, the global commercial real estate market, which had previously benefited from ultra-low interest rates and flourished, is facing severe challenges. Soaring office vacancy rates, significant asset value declines, and escalating debt default risks are brewing a potential commercial real estate crisis in major cities such as New York, London, Berlin, and even China, posing a serious threat to regional banking systems.
I. Causes of the Crisis: A “Perfect Storm” Triggered by Monetary Policy
The current predicament of commercial real estate is the result of a combination of cyclical and structural factors.
1. A Dramatic Shift in Monetary Policy: This is the most direct trigger. Commercial real estate heavily relies on debt financing, primarily medium- to long-term loans of 3-10 years. When central bank interest rates surged from near zero, the refinancing costs for real estate companies increased exponentially. Many projects' cash flow could not cover new interest expenses, leading to defaults and sell-offs.
2. The “Structural Shock” of Remote Working: The COVID-19 pandemic has permanently changed work patterns. The widespread adoption of hybrid and remote working has led to a permanent decline in demand for office space. The record high vacancy rates in Grade A office buildings in major cities, coupled with declining rental income, have directly shaken the foundation of commercial real estate valuations.
3. Continuing Transformation in the Retail Sector: The rise of e-commerce has already impacted brick-and-mortar retail, and the pandemic has accelerated this process. Shopping malls, retail stores, and other formats face long-term pressure from shrinking demand.
4. "Momentum Wall" Pressure: In the coming years, trillions of dollars in commercial real estate mortgage loans will mature globally. These loans need to be refinanced in the current high-interest-rate environment, posing a significant "momentum wall" risk.
II. Risk Transmission: Why Does the Commercial Real Estate Crisis Trigger Systemic Concerns?
The commercial real estate market is not isolated; its risks can permeate the entire financial system through multiple channels.
1. Direct Impact on Regional Banks: Unlike large multinational banks, regional banks in the United States and some savings banks in Europe are the main providers of commercial real estate loans. These loans constitute a significant portion of their asset portfolios. 1. When commercial real estate values decline and non-performing loans surge, it directly erodes the capital of these banks, triggering a liquidity crisis and confidence crisis similar to the collapse of Silicon Valley Bank in 2023. The Federal Reserve's stress tests have repeatedly listed this as a key risk.
2. A vicious cycle of asset impairment and credit tightening: Banks suffering losses due to real estate impairment will lead them to tighten credit standards across all sectors, including households and small businesses—a "credit tightening." This, in turn, will suppress consumption and investment, exacerbate the economic recession, further dampen real estate demand, and create a negative feedback loop.
3. Volatility in the CMBS market: Commercial mortgage-backed securities (CMBS) package and sell large amounts of real estate loans to global investors. Once the default rate of the underlying loans rises, the value of CMBS will plummet, impacting a wide range of institutional investors, including pension funds and insurance companies, and triggering financial market turmoil.
4. A "hidden bomb" for local government finances: Commercial real estate is a significant source of tax revenue for many city and local governments. The decline in real estate values and rising vacancy rates mean reduced property and transaction tax revenues, which will force local governments to cut public services or increase other taxes, causing a secondary blow to local economic and social stability.
III. Responses and Future Outlook: A Slowly Deflating Crisis
Unlike the rapid outbreak of the 2008 subprime mortgage crisis, this round of commercial real estate crisis may be a slow, deflating process.
1. Regulatory Alertness: Regulators such as the Federal Reserve and the European Central Bank have attached great importance to this risk, strengthening supervision and stress testing of banks, especially regional banks, and requiring them to increase provisions to cope with potential losses.
2. Banks' "Extension and Pretend": In many cases, banks may choose to cooperate with distressed borrowers, modifying loan terms and extending loan terms to avoid immediate defaults and asset write-downs. This strategy is called "extension and pretend," which, while delaying the outbreak of the crisis, may only postpone the problem and accumulate greater risks.
3. Capital Restructuring and the Emergence of Opportunities: Crises also breed opportunities. The decline in asset prices has attracted the attention of alternative investment giants such as Blackstone and Bofeng, who are raising substantial funds to acquire high-quality assets at a discount. Simultaneously, a movement to reshape the functions of urban spaces is emerging—office-to-residential conversion projects are becoming feasible in some cities, potentially offering a win-win solution to both vacancy rates and housing shortages.
Conclusion: The global commercial real estate crisis is a "time bomb" in the post-pandemic era coupled with a high-interest-rate environment. It is unlikely to trigger a global financial crisis on its own, but it is highly likely to be the "last straw" that breaks the back of some vulnerable financial institutions (especially regional banks), significantly amplifying the depth and duration of the recession during economic downturns. How to orderly resolve this crisis, primarily driven by debt and structural changes, and prevent it from evolving into systemic risk, is a tremendous test of the wisdom and resilience of central banks, regulatory agencies, and market participants worldwide. This crisis also forces a rethinking of the function of cities, the nature of work, and the core logic of asset pricing.
