Turmoil In German Commercial Real Estate Market Raises Red Flag For US Office REITs: 5 Stocks To Watch

Commercial real estate transaction volumes are falling sharply in many parts of the world, prompting fears that the U.S. office market will soon experience the same fate.

Bloomberg reported Wednesday that deal volumes in Germany’s commercial real estate market dropped by 50%, to €14.9 billion ($16.2 billion), in the first half of 2023, the lowest levels seen since 2017.

Similar tendencies have been noticed in other European countries, including Sweden, Ireland, and the United Kingdom, where buyers and sellers are unable to reach an agreement on pricing.

The impact of rising interest rates, which have increased borrowing costs and increased demand for yields among potential property investors, is considered the fundamental cause of this drop.

Despite falling bid prices, property owners are still unwilling to accept significant discounts to book values due to concerns about prospective debt ratio increases.

This has led to a frozen commercial real estate market where a big gap separates buyers and sellers. The longer it goes on, the more likely it is that it will end in favor of the buyers.

End of The Real Estate’s Bonanza?

The consequences of these market conditions are significant, as investment bank Stifel warns that the industry may face a decade of limited earnings growth.

German residential landlords, such as LEG Immobilien SE LEGIF, TAG Immobilien AG TAGOF, and Vonovia SE VONOY have recently been downgraded to a Sell, reflecting the shift in market dynamics.

Analysts at BNP Paribas suggest that the era of continuous real estate growth fueled by inexpensive financing has come to an end, and a “protracted hangover” lies ahead.

Also Read: What In The World Is Going On At Vornado Realty?

5 U.S. REITs Vulnerable To The Office Real Estate Market

1. Boston Properties Inc. BXP: Boston Properties is a leading real estate investment trust (REIT) focused on owning and operating office properties in major U.S. cities. They have a diverse portfolio of high-quality office buildings across key markets.
   
2. SL Green Realty Corp. SLG: SL Green Realty is a real estate investment trust that primarily focuses on office properties in New York City. They own and operate a significant portfolio of premier office buildings in Manhattan.
   
3. Alexandria Real Estate Equities Inc. ARE: Alexandria Real Estate is a REIT specializing in the development, acquisition, and management of life science and technology campuses, including office spaces. They have a strong presence in innovation clusters such as Boston, San Francisco, and San Diego.
   
4. Vornado Realty Trust VNO: Vornado Realty Trust is a major player in the office real estate market, with a focus on properties in New York City and Washington, D.C. They own and operate Class A office buildings, retail spaces, and other properties in prime locations.
   
5. Kilroy Realty Corporation KRC: Kilroy Realty is a prominent office REIT with a focus on West Coast markets, including major cities like Los Angeles, San Francisco, and Seattle. They specialize in the development, acquisition, and management of office properties catering to technology, life sciences, and other innovative industries.

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This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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