The real estate sector is currently experiencing one of the most severe crises in its history. The number of building permits has dropped by a quarter, and transaction volumes have plummeted by more than 70 percent. Few expect a genuine recovery in the short term. What can companies do now to escape the downward spiral of the industry? Christian Kuhs, founder and Business Development at Nordantech, discussed this with enomyc founder and Managing Partner Uwe Köstens, and enomyc partner and real estate expert Matias Otto, in the #SHIFTHAPPENS Podcast by Nordantech. Here are some key excerpts from the conversation.
On the Causes of the Current Crisis
Uwe Köstens: The real estate market has experienced significant shocks in recent years. Particularly, the unforeseen rapid increase in interest rates has caused uncertainty, with the rapid succession of rate hikes being especially notable. The market froze because ten rate hikes within about 17 months had never happened before. However, these are just some of the many factors influencing the market.
Matias Otto: I think it's fair to speak of a multi-crisis. Many factors are at play, including increasing regulatory requirements. This affects financiers as well as execution. A multitude of technical rules and requirements in Germany are significantly higher than in neighboring countries, where construction still manages to function. Another point is the shortage of skilled workers, even in the real estate sector. This issue will accompany us even more intensely in the coming years, especially in construction. This leads to projects not being carried out to the extent and within the time frames that were originally intended.
Besides cyclical issues and the multi-crisis, the industry is also grappling with structural problems that will accompany us in the coming years. One keyword is the topic of home office. It may sound harmless, but it has massive consequences. A recent study on the top seven office markets in Germany assumes that 12 to 15 percent of office spaces will remain vacant in the medium scenario, as they will no longer be needed when people are in the office only about three days a week on average. Considering the future structural vacancy this implies, it becomes clear that the commercial real estate market faces a significant challenge.
On the Artificial Aging of Properties Due to Increasing Sustainability Requirements
Matias Otto: Many requirements come from the EU level. At the same time, we notice that sustainability has now become a tenant issue, especially in the commercial sector. Many rentals only work if certain standards expected by tenants are met, be it for corporate governance or other reasons.
This has dramatic consequences, particularly for existing buildings and financiers. If you have a commercial property with a corporation or retailer as an anchor tenant, you can expect that a lease renewal often only happens at high standards, even if the building's basic structure is completely fine. This means that ESG topics cause an artificial and premature aging of the property. Consequently, the lending values within the individual institutions decrease. This will cause significant problems for some banks.
On the “Awakening Experience” in Real Estate
Uwe Köstens: At enomyc, we have always dealt with companies in special situations. Then there was an "awakening experience": Three years ago, a major bank approached us. They had a single asset property in a crisis situation. They had a restructuring report done, 180 pages for a lot of money, but they were just as wise as before. That’s when we started thinking about how we could transfer what makes enomyc unique, namely advising in special situations, to the real estate sector.
On Courage and the Right Mindset: Key Success Factors on the Way Out of the Crisis
Uwe Köstens: In all special situations, it is crucial to be alert, think in scenarios, and, most importantly, calculate everything to the end. It takes courage to face the truth because if things go in the wrong direction, you must admit it and consider a Plan B or C. For instance, you might seek a judicial solution through StaRUG or a self-administration procedure. Our motto at enomyc is: Hope is not a strategy. If Plan A cannot be realized, Plan B must be initiated very quickly, because insolvency law involves deadlines, and it can quickly become unpleasant.
Matias Otto: I can only confirm this. Only if the participants are willing to change their mindset will the turnaround succeed. In the golden decade of the real estate industry, from 2011 to 2021, it was different. Almost every ambitious calculation worked out in the end because the soft blanket of the exit covered everything – regardless of how risky the whole venture was or what setbacks occurred during project development. That no longer works.
What we see today is an overreaction in the other direction: small stumbling blocks can endanger entire projects. Therefore, it is crucial to return to realistic assumptions, consider scenarios, and conduct stress tests from the start. This may also include parting with properties to ensure that the overall business or financing is not infected. I believe that many have not yet grasped this clarity. We help by showing options and providing concrete examples of how we have saved entire companies and restored financing through our approach.
Uwe Köstens: In every crisis, the accuracy of numbers is crucial. It is no different in real estate than in other industries – with the only difference being that real estate always involves large numbers. Therefore, the potential damage is significant. Affected companies should initiate professionalization early through internal steps, but also by involving external advisors, which I believe is indispensable.
Fourfold Competence: On the Requirements for a Restructuring Partner
Uwe Köstens: In my view, a quartet of specific competencies is crucial. The team should first have real estate-specific expertise. Secondly, numerical expertise, as they must be able to create decision-ready bank documents from a rudimentary set of numbers. Thirdly, the advisors must be proficient in financing issues and dealing with financiers, not just banks, but also pension funds, mezzanine lenders, and others. Fourthly, they must be accustomed to dealing with difficult situations.
Matias Otto: This quartet is reflected in our team composition. This sets us apart from many competitors. We have the original real estate competence in-house with a team of architects, real estate economists, and other industry experts, but also internal specialists for project management, distressed M&A, debt advisory, restructuring, and insolvency law. This means we can always assemble the best-suited team for each project from our pool of in-house experts.
From Healthy to Distressed, from Restructuring to Second Opinion: On enomyc’s Service Portfolio
Matias Otto: We have a broad range of services. On one hand, we are involved in marketing, i.e., transactions from distressed real estate, but also in the "healthy business." We structure and execute sales processes to achieve the most successful outcomes for buyers and sellers. A second area involves performance-related concepts that we create for our clients: everything around strategy, but also restructuring, reorganization, and other advisory services. Restructuring and reorganization topics are further subdivided. We prepare reports, independent business reviews, as well as reports according to IDW S 11 and 6 standards, and second opinions, requested by financiers or companies. The third area comprises original real estate economic concepts, where we conduct real estate-specific analyses, such as profitability analyses, scenario evaluations of developments, existing properties or portfolios, qualitative assessments of plans, lease contract optimization, and much more.
On the Future Outlook for the Industry
Matias Otto: This question is hard to answer generally because there is no single "real estate industry." The situation of a residential building is entirely different from that of a rental property or a logistics property. Regarding the commercial real estate sector, I do not believe much will change this year. The peak has not yet been reached because there is a pronounced time lag in financing. Without dramatizing, I do not see a serious upswing before the end of 2025 from today's perspective.
Uwe Köstens: There will also be changes in banks' lending policies. They will become significantly more restrictive because the share of real estate financing in the total loan portfolio is high, and the share of problem loans in the real estate portfolio is still rising dramatically. There are rumors of a 7 percent rate at some state banks. That's a lot, and the institutions will continue to have to make individual value adjustments. This will, in turn, lead them to be restrictive or selective in new business. The danger comes from several sides. We expect the situation to normalize no sooner than 2026.
Listen to the full conversation of Christian Kuhs, founder and Business Development at Nordantech, with enomyc founder and Managing Partner Uwe Köstens, and enomyc partner and real estate expert Matias Otto, on the #SHIFTHAPPENS Podcast by Nordantech:
#16: ON REAL ESTATE PORTFOLIOS, LENDING DECISIONS, AND THE FUTURE OF THE REAL ESTATE INDUSTRY
Thank you for the insightful discussion, Christian Kuhs!
