Global property markets, shaken by the steepest interest rate hikes in a generation, are unlikely to see significant relief from the gradual easing of borrowing costs. There’s little hope of returning to the era of easy money that fueled a property boom.

The multi-trillion-dollar industry, which flourished in the decade after the global financial crisis when borrowing costs were near zero, has been hit hard by rising interest rates. Central banks have pushed up borrowing costs, and now institutions like the European Central Bank, Bank of England, and others in Switzerland and Sweden are beginning to cut rates, making borrowing slightly cheaper. The U.S. Federal Reserve is expected to follow suit.

However, industry leaders and bankers are not optimistic about a quick recovery. The property sector, which thrived on low rates and vast inflows of capital, is now losing funds as investors shift towards bonds and savings accounts that offer better returns.

“We’re not out of the woods yet,” said Andrew Angeli, global head of real estate research at Zurich Insurance. He suggested that the property sector is unlikely to experience a rapid turnaround.

The past two years of rate hikes have led to many casualties in the industry, including companies like Signa, which owned prestigious buildings in Germany. This has resulted in incomplete housing projects and vacant skyscrapers. In Germany, property insolvencies have been rising since early 2022, with over 1,100 recorded in the first half of this year, according to consulting firm Falkensteg.

In Britain, the construction sector has also been hard hit, recording the most insolvencies of any industry for the past two years, with approximately 4,300 cases in the 12 months leading up to June 2024.

The pain is especially acute in the office sector, which has been hit by both rising borrowing costs and the shift to remote work. The housing market is also feeling the strain, with prices falling in Germany and stagnating in Britain.

“I’ve never worked so hard and felt like I have nothing to show for it,” said Brian Walker, president of NAI Burns Scalo, a Pittsburgh-based property company. He added that some office buildings are being returned to banks as owners default on loans.

Cornelius Riese, CEO of DZ Bank, one of Germany’s largest property lenders, said it could take three years for the effects of higher rates to fully work through the system. He estimated that “we’re about two-thirds of the way through” this period of uncertainty.

Adding to the tension is the economic slowdown in major countries like Germany and China, which is contributing to market jitters.

The stakes are high. Real estate investment firm JLL estimates that $2.1 trillion worth of global commercial real estate debt needs to be repaid this year and next. While about one-third of that was refinanced in the first half of 2023, a shortfall of up to $570 billion could arise next year.

Many U.S. investors have already returned keys to office buildings to lenders, as seen with Brookfield Asset Management’s decision to relinquish ownership of New York’s iconic Brill Building. Some smaller banks, which heavily invested in property during the boom, are now at risk.

Rebel Cole, a finance professor at Florida Atlantic University, has identified 62 smaller U.S. banks that are overexposed to the struggling property sector. These banks, reliant on large deposits, are vulnerable if withdrawals spike suddenly.

“There’s a massive wave of loan maturities coming next year,” said David Aviram, co-founder of Maverick Real Estate Partners, a New York-based investment firm. This is putting pressure on banks to offload loans, although some have received offers as low as 40% of the loan’s face value, prompting them to hold onto the bad debt instead.

Selling properties is also proving difficult. Earlier this year, a company liquidator slashed 160 million pounds ($209.89 million), or 60%, off the purchase price of a London Canary Wharf office tower, but the sale still failed.

Some believe banks are in denial. European regulators suspect banks may be concealing the true state of their loan portfolios by not accounting for falling property prices.

Waiting could worsen the situation, as a gap widens between desirable properties and those in less favorable locations. In Los Angeles, for example, the Century City commercial district around Fox Studios is thriving, while much of downtown is struggling, with buildings going bankrupt and large amounts of office space vacant, according to Jeffrey Williams, an investor at Schroders Capital.

In Sweden, one of the hardest-hit property markets, a recent rate cut has sparked some hope. “It’s better if you believe that capital costs will remain low and property prices will rise,” said Leiv Synnes, CEO of SBB, one of the country’s troubled property groups. “The mood has completely shifted now.”

($1 = 0.7623 pounds)