Coverage: weekly note · Information to 27 March 2026
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TGB Weekly Research Note · 27 March 2026
German commercial property prices have stabilised, but office prices were still 13.7% below mid-2022 in the third quarter of 2025, and bad loans are still rising.
The desk view
BaFin reports office prices 13.7% below their mid-2022 level in the third quarter of 2025, despite slight quarterly gains in the main commercial submarkets since the second quarter of 2024. Commercial real estate NPL ratios reached 6.4% at significant institutions and 4.4% at less significant institutions, after rising steadily since the beginning of 2023. At Deutsche Pfandbriefbank (pbb), the home market is now a large source of new problem loans: almost half (around 43%) of the loans it newly classified as non-performing in 2025 were for German office buildings. Our reading is that credit losses will lag the price trough, so the next stage is more likely to be a slower rise in problem loans than a reversal.
Prices have stabilised, but offices have not recovered
Prices in Germany's three main commercial real estate submarkets have risen slightly from quarter to quarter since the second quarter of 2024, according to BaFin. The recovery has not closed the earlier gap: office prices fell 13.7% between the second quarter of 2022 and the third quarter of 2025, retail prices 14.9% and commercial residential prices 3.6%.
The Bundesbank described prices as having stabilised in its November 2025 Financial Stability Review, but called the situation fragile overall and noted that price developments rest on a small number of transactions. Its price-at-risk model put the 10th percentile of commercial property price growth from the second quarter of 2025 to the second quarter of 2026 at around -9%, only marginally better than the slightly less than -10% of a year earlier. BaFin pointed to very low transaction volume, weak demand and the high rate of remote work, and saw a risk of further price declines because of weak economic growth.
The ECB's November 2025 review reported that investors in Germany and Austria saw the market as having reached its trough, while euro area transaction numbers remained about 30% below their 2019 peak.
Price change by property type, Q2 2022 to Q3 2025, %
Credit quality is still catching up
Commercial real estate loans made up about 9% of German banks' aggregated total assets in the third quarter of 2025. BaFin reports the commercial real estate NPL ratio at 6.4% for significant institutions and 4.4% for less significant institutions at that date, a gap of 2.0 percentage points. Both the ratio and the volume of NPLs have risen steadily since the beginning of 2023, although the pace has recently slowed. IMF staff put NPLs on commercial real estate loans at 5.3% in June 2025, when total NPLs were 1.9% of loans, up from 1.7% a year earlier.
Systemically important banks, which are more exposed to the distressed US real estate sector, show higher default rates, according to the Bundesbank. BaFin noted that German significant institutions had increasingly lent in the US, where commercial property prices have fallen by almost one fifth since March 2022. Significant institutions are also more vulnerable at refinancing, BaFin said, because their commercial real estate and developer loans were often granted without recourse to other assets or as bullet loans, while collateral valuations are likely to decline gradually.
Loans to project developers make up 16% of commercial real estate loans, and the share remortgaged at the end of the term has almost doubled over four years to 80%, which the Bundesbank said could indicate difficulty selling properties as planned. The Bundesbank said risks in commercial real estate financing remain elevated and could lead to further loss allowances.
Specialist lenders: US legacy loans and new German office problems
BaFin flags specialist lenders, which may not be able to offset losses through other business areas, as facing increased risk. pbb reported a 2025 pre-tax loss of €250 million after a €104 million profit in 2024, as risk provisions rose to €410 million from €170 million. Net stage 3 additions for European real estate rose to €151 million from €76 million, largely because of development financing in Germany.
pbb's non-performing loans rose by 22.1% to €2,323 million at the end of 2025, of which €909 million related to the US. Of the €658 million newly classified as non-performing in 2025, around 43% were loans for German office buildings. German offices also accounted for €383 million, or around 56%, of the €688 million moved onto the watchlist, and around 62% of the €486 million moved from the watchlist into restructuring.
Aareal Bank shows the other side of the pattern. Its NPLs fell to €1.1 billion from €1.4 billion and are predominantly US office loans, while loan impairment charges fell 19% to €322 million, including €55 million of extra US charges to cut US office exposure faster.
Two German specialist lenders, 2025
| Measure | pbb | Aareal Bank |
|---|---|---|
| Risk provisions / loan impairment charges | €410m | €322m |
| NPLs, end-2025 | €2,323m | €1.1bn |
| NPL composition | €909m US; German offices about 43% of 2025 new NPLs | Predominantly US office loans |
| CET1 ratio, end-2025 | 14.9% | 15.5% (Basel IV fully phased) |
Source: Deutsche Pfandbriefbank AG (pbb), pbb: US exit shapes 2025 results – New Business grows significantly (press release), 5 March 2026; Aareal Bank AG, Aareal Bank posts strong operating performance in 2025 financial year (press release), 5 March 2026; Deutsche Pfandbriefbank AG (pbb), Annual Report 2025, 23 March 2026.
On these figures capital is not yet the binding constraint at either bank, but pbb's buffer could narrow. After the EBA's 27 February 2026 view on US data, pbb estimated that losing its US real estate RWA treatment would add about €800 million of RWA and cut its CET1 ratio by about 1.2 percentage points, to roughly 13.7% on the end-2025 figure, against a minimum target of 13% for 2026.
Supervisors are testing valuations, not raising buffers
BaFin said it will analyse whether banks value their commercial real estate regularly and appropriately, and will conduct special inspections at banks with high commercial real estate risks. In a statement to the IMF Board, Germany's Executive Director said the commercial real estate downturn had been orderly so far and cited on-site inspections, deep dives into banks' portfolios and a new top-down macroprudential stress test for commercial real estate. It said macroprudential capital buffers will be maintained for now. IMF staff judged commercial real estate risks still elevated, with tentative signs that they may be nearing a peak. The Bundesbank considers the current level of capital buffers adequate and the 0.75% countercyclical buffer on domestic exposures appropriate, and IMF staff put the banking sector's CET1 ratio at 17.4% in June 2025.
The implication for banks is that the price floor matters less than collateral marks and refinancing. With office values still well below their earlier level and supervisors questioning valuations, further provisions are more likely to come from loans that reach refinancing, especially development and office loans, than from new price falls.
What to watch
- April 2026: managers of real estate special funds must use at least two statutory liquidity management tools.
- 2026: Aareal Bank expects NPLs to fall below €1 billion.
Primary sources: Federal Financial Supervisory Authority (BaFin), Risks in BaFin's Focus 2026: 3. Risks arising from the commercial real estate markets, 28 January 2026; Deutsche Bundesbank, Financial Stability Review 2025: Stability situation in the German financial system, 6 November 2025; Deutsche Pfandbriefbank AG (pbb), Annual Report 2025, 23 March 2026; European Central Bank, Financial Stability Review, November 2025, 26 November 2025; International Monetary Fund, Germany: 2025 Article IV Consultation, Press Release; Staff Report; and Statement by the Executive Director for Germany (IMF Country Report No. 26/36), 12 February 2026; Deutsche Pfandbriefbank AG (pbb), pbb: US exit shapes 2025 results – New Business grows significantly (press release), 5 March 2026; Aareal Bank AG, Aareal Bank posts strong operating performance in 2025 financial year (press release), 5 March 2026.