The Financial Stability Board (FSB), the international body that monitors and makes recommendations about the global financial system, has issued a stark warning about vulnerabilities in the $12 trillion commercial real estate market. As reported by the Financial Times, the FSB has called on regulators worldwide to address growing threats posed by excessive leverage, liquidity mismatches, and insufficient data on bank exposures to the sector.
The watchdog’s latest report highlights the increased volatility of commercial property assets compared to other investment classes. It warns that the sector could face further pressure from weakening demand—particularly for office and retail spaces—driven by the shift toward remote work and evolving environmental regulations.
While the FSB noted that commercial property markets have so far “weathered the recent adverse developments,” it cautioned that this resilience may be temporary. The apparent stability has been attributed to selective market downturns, refinancing efforts by distressed borrowers, and comparatively moderate leverage levels relative to past financial crises.
However, underlying stress is becoming more evident. According to the report, non-performing loans linked to commercial office buildings have risen sharply in the United States and Australia. Meanwhile, interest rates on commercial mortgage-backed securities (CMBS) have significantly outpaced those on other types of corporate loans. By September 2024, distress levels in the CMBS market reached 12.6% for office assets and 11.2% for retail.
The FSB estimates that global debt in the commercial real estate sector stands at around 45% of total assets, with certain real estate investment funds and property funds—particularly in the U.S., Canada, Singapore, and Germany—holding debt levels at least three times their equity. This level of leverage raises the risk of significant losses if market conditions deteriorate further.
Banks remain the largest holders of commercial real estate exposure, accounting for approximately $8.5 trillion globally. However, the report draws attention to “complex interlinkages” between banks and non-bank property investors, warning that such relationships could amplify systemic shocks. The FSB urged regulators to close the “considerable data gaps” in understanding these connections.
The report also recalled how several open-ended property funds during the COVID-19 pandemic imposed restrictions or suspended redemptions to cope with liquidity constraints. Some funds continue to exhibit “significant liquidity mismatches,” making them susceptible to investor runs. The FSB praised measures taken by countries like Germany and Italy to stabilize the sector—Germany has enforced minimum holding periods, while Italy mandated closed-end property funds.
Despite lacking binding enforcement authority, the FSB plays a critical role in shaping global financial regulations by bringing together top central bankers, finance ministers, and regulators. Its latest recommendations come as Klaas Knot prepares to step down as FSB chair and president of the Dutch central bank. He will be succeeded by Bank of England Governor Andrew Bailey next month.
