Just weeks before resigning from his position as CEO of Deutsche Pfandbriefbank, Andreas Arndt is facing investor concerns, mainly due to loans granted by the company for commercial real estate in the United States. A tipping point was reached last week when its bonds and stocks fell to record lows after increased defaults in the US real estate market hit two lenders in New York and Tokyo, raising fears of contagion.

Last June, over half of the bank’s loans within its dominant real estate financing unit were for office buildings. The unit’s American exposure, at 4.8 billion euros, far exceeded the lender’s total equity of 3.3 billion euros.

The bank made expansion into the world’s largest economy a cornerstone of its strategy by opening an office in New York in 2018. Over a few years, the company’s exposure to US commercial real estate grew from zero to 15% of its total real estate financing volume.

This initiative proved ill-timed when the COVID-19 pandemic fueled a trend towards hybrid work modalities and raised questions about the need for office space. Deutsche Pfandbriefbank’s stock price peaked just before the pandemic began to shake the markets four years ago, then plunged by about 60% in the following weeks. Last year’s interest rate hikes exacerbated the situation.

The Bank’s expansion into the US office market occurred very late in the cycle. The result of this push was disastrous as credit provisions exploded. Deutsche Pfandbriefbank’s problems do not stop at its exposure to the United States. The company also lent to the bankrupt real estate and retail empire Signa Holding, formerly led by Austrian tycoon René Benko. Signa’s insolvency records show that the bank lent to at least five projects in Germany and Austria.

The Bank was created in 2009 from the functional elements left behind by the collapse of Hypo Real Estate. This mortgage lender became the biggest casualty of the financial crisis in Germany. The country’s bank rescue fund took full ownership in 2009. The government sold much of its stake in Deutsche Pfandbriefbank through a public listing in 2015 and completely divested its shares in 2021. As a public company, the lender faced increased investor scrutiny on its growth and profitability goals. However, increasing competition and declining margins in its domestic market, where the European Central Bank introduced negative interest rates for the first time in its history, have limited the company’s prospects.

At the same time, the crisis in the office real estate market in Germany is accelerating, with a record quarterly decline of 13% compared to the previous year, according to data released by the German banking association VDP. For the year, prices fell by more than 10%, the largest drop since records began in 2003, and further declines are expected in early 2024. The difficulties in the commercial real estate market threaten to plunge some banks into turmoil.