German Bank Predicts Hit in US Office Market

Banks and regulators around the world have identified commercial real estate as a weak link in global finance

Even as the commercial real estate market of the United States looks for solutions with clients to keep loans from souring, a German bank that finances property worldwide has predicted a possible hit in the country’s office market. Jochen Kloesges, CEO of German bank Aareal, said the US office market was challenging, though it should be seen in shades of grey rather than black-and-white. "The US is dark grey. You have to be honest about it," he said.

Aareal has a US office loan portfolio of around 3.9 billion euros ($4.26 billion) across some 50 transactions. Around 4 per cent of the portfolio is so-called Stage 3 loans that are at risk. "It's clear that individual cases can hit us in this portfolio this year. This can result in risk provisions here and there that are perhaps somewhat higher, or also considerably higher, than we originally anticipated," he said.

The bank has previously expected allowances for possible loan losses this year of between 170 million euros and 210 million euros, but it has said it is comfortable if it exceeds that level because it is generating healthy interest income.

Aareal has been working with customers over the past year to deal with the sector's weakness, Kloesges said. "It is not our goal to make customers sweat. We try to find solutions together," he said. The company will still meet its targets for the year, and the other property sectors it finances, including hotels, retail and student housing, are going strong, the CEO said.