US Commercial Real Estate Contagion Spreads to Germany and Japan

The commercial real estate (CRE) sector in the United States continues facing significant losses, marking a crisis that experts are calling the worst since the financial crisis of 2008.

I don’t believe that the CRE meltdown will be the trigger of the fiat currency debt system collapse, but it will certainly play a role in contributing to the final event.

This downturn has not only destabilized the US regional banking sector but has also spread as a contagion to Europe and Japan, showcasing the interconnected nature and instability risks of global fiat financial markets.

The Epicenter: The US CRE Crisis

The US CRE sector is currently experiencing unprecedented stress, primarily due to the seismic shifts in work culture brought on by the government’s response to COVID-19.

The transition to remote work has left office buildings vacant, causing a steep decline in rental incomes and property values.

According to a report by Forexlive, Goldman Sachs estimates that $1.2 trillion in mortgages are due by the end of next year, with much of it underwater.

This situation has led to significant losses for regional banks and financial institutions heavily invested in commercial real estate loans.

More Bad News for Germany: Multiple Banks

Germany, Europe’s largest economy, has not been immune to the repercussions of the US CRE crisis.

Deutsche Pfandbriefbank (PBB), a German lender with a focus on real estate, has had to increase its provisions for bad debts significantly, bracing itself for what it describes as the worst decline in commercial property values in 15 years.

The bank has set aside as much as €215 million ($231.7 million) for potential losses on loans, highlighting the “persistent weakness of the real estate markets”.

Similarly, Deutsche Bank has allocated €123 million ($133 million) to cover potential defaults on its US commercial real estate loans, indicating the far-reaching impact of the US crisis on European banks.

The Situation in Japan: Aozora Bank’s Unexpected Losses

Aozora Bank, based in Tokyo, Japan, has encountered significant financial distress due to its exposure to the U.S. commercial real estate market, marking a dramatic shift in the bank’s balance sheet health.

This situation has led Aozora Bank to report its first annual net loss in 15 years, a stark reversal from its previous net profit projections.

The bank has been compelled to take massive loan-loss provisions for U.S. commercial property as valuations have plummeted in the wake of rising borrowing costs and a decrease in demand exacerbated by the shift to remote work.

This financial turmoil resulted in a projected net loss of 28 billion yen ($190.5 million) for the fiscal year ending March 31, significantly deviating from an initially expected net profit of 24 billion yen. Consequently, Aozora Bank has decided to forgo dividends for the remainder of the financial year.

The ongoing CRE crisis in the US serves as a stark reminder of the global fiat financial system’s interconnectedness and risk of contagions spreading worldwide.

Banks and financial institutions worldwide are now facing the ripple effects of this downturn, with the full extent of potential losses and their distribution across the financial sector still unfolding.