The German economy doesn’t need any more problems.

The engine of European growth is stuck in neutral. Germany’s mired in a multi-quarter “slow-cession” (to use an apt characterization from ING) and as the Ifo despaired last month, there’s no perceptible light at tunnel’s end.

If the Germany economy shrinks this year, it’d mark the first two-year recession in decades. Suffice to say the list of challenges is long and the weight of the war’s heavy. It doesn’t help that the Chinese economy, a key destination for German exports, is likewise moribund.

But when it rains it pours, and now Germany has to worry about commercial real estate. Last week, Deutsche PBB — which specializes in CRE finance — plunged after becoming the latest lender to set aside more for prospective losses.

The bank didn’t dance around the issue. “In light of the persistent weakness of the real estate market, PBB further increased its risk provisioning in the fourth quarter of 2023,” an impromptu press release read. “Despite these expenses, PBB remains profitable thanks to its financial strength — even in the greatest real estate crisis since the [GFC].”

That latter bit from PBB (regarding the scope of the burgeoning crisis) was quite the assessment. A day later, the bank reassured on its liquidity position, telling investors it has “sufficient long-term unsecured funding,” isn’t planning a senior unsecured issue in 2024 and has €6 billion in fixed-term retail deposits with an average maturity of more than three years. Its refinancing requirements “are largely covered for 2024,” the bank was keen to note.

PBB’s bonds dropped sharply last week, apparently prompted by a Morgan Stanley sell call. Sellers had to offer “sizable discounts,” traders told Bloomberg. PBB’s obligations weren’t alone in plunging.

As the chart shows, the same bonds came under pressure a few months ago, when PBB slashed its outlook.

The bank has an index for office properties. It measures “cyclical fluctuations” in an effort to “provide real estate investors and lenders with reliable information on the current office property market situation in Germany.” You know, “real estate investors and lenders” like PBB.

As you might imagine given the bank’s rather stark characterization of the environment (i.e., as a backdrop akin to the GFC), the index is near “crisis” territory. Or at least it was in November, the latest update. I can’t imagine things have improved much since then.

“As is the case for the German economy as a whole, the big 7 markets for office space are also suffering from sluggish demand,” PBB said, in the color accompanying the Q3 update on the gauge. “Big 7” refers to Berlin, Hamburg, Munich, Cologne, Frankfurt, Dusseldorf and Stuttgart, the “most important German office markets.” The index has three components. The slider below the chart indicates that all of them were negative contributors in Q3, just as they were the prior quarter.

As discussed here on at least three occasions this month, the CRE story isn’t going away. Indeed, it’s likely to be a fixture of the macro-financial news cycle in 2024. As the office market thaws, price discovery will force some banks to mark their portfolios to market. Those marks won’t be favorable, provisions will rise and downgrades will probably follow. Downgrades could impair efforts to raise capital, and around we (might) go in a self-fulfilling prophecy. I’m not suggesting that’s inevitable. But it’s playing out on a small scale already.

In Germany, office property prices fell more than 5% in Q4 from Q3, banking association VDP said Monday. The decline was more than 13% YoY, the largest 12-month drop ever, and by a country mile.

Note that the sequential decline (i.e., the quarterly deterioration) was the sixth straight, and also counted as the largest on record.

“The property crisis is affecting the commercial segment more than the residential segment [and] the spotlight is currently on office properties,” VDP chief Jens Tolckmitt said Monday.

Meanwhile, German Finance Minister Christian Lindner tried to reassure markets. CRE’s in an “adjustment period,” he told Bloomberg, in an interview. He noted that the relevant German banks are under the ECB’s supervision, not his, but said that “from what [I know] the market as a whole is stable.”

Maybe it is. Stable, I mean. But it’s also indeterminate. “Demand for offices remains subdued due to uncertain economic growth in Germany and the still-unclear impact of the work-from-home trend on office space needs,” VDP’s Tolckmitt went on to say, in the same Monday report cited above. “So prices continue to fall.”