German CRE—Risks Are Rising, But Likely to Remain Under Control

This commentary looks at the German commercial real estate (CRE) market and the asset-quality risk exposure from a bank lending and CMBS perspective. The analysis focuses on how lending is withstanding the challenges of the current economic climate.

Key highlights:
-- DBRS Morningstar expects the combination of higher funding costs, increased refinancing risks, lower valuations and increasing vacancies to result in a higher probability of loans defaulting.
-- DBRS Morningstar notes that CMBS investors have generally shifted their capital asset allocation toward property types for which strong rental demand and supply constraints exist, such as the logistic sector.
-- DBRS Morningstar's outlook for 2024 remains negative for the office and retail asset types, with rising concerns for the residential market. While the logistics or light industrial remains robust.

“We expect asset quality to deteriorate in bank CRE portfolios, however, conservative underwriting, extended fixed-rate periods, and precautionary loan loss provisions in form of management overlays can provide some downside protection for most banks”, said Sonja Forster, Vice President of FIG at DBRS Morningstar. “The outlook for the CMBS transactions backed by German logistic assets remain stable, as it continues to benefit from the growth of online shopping, while an environment of rising interest rate makes refinancing more challenging for the transaction secured by German multifamily as residential rental growth might not be enough to offset upwards investment yields”, added Patrizia Catanese, Assistant Vice President of CMBS at DBRS Morningstar.