As much as $175B of global real estate credit is already in distress following slowdowns in commercial real estate markets last year, and more pain is expected in 2023.

Distress levels in Europe are now the highest they have been in a decade, and property values fell by 20% in the UK and 9% in the U.S. during the second half of 2022, Bloomberg reports. The drop in values means the industry has approximately four times as much distressed debt as the next biggest industry — and could potentially mean credit turmoil spreads to other parts of the global economy.

Decreased transactions and less development in commercial and residential real estate will likely have a knock-on effect on other spending in the economy, leading to risks to jobs and growth, per Bloomberg.

“Property is a major recession variable,” Adam Tooze, a history professor at Columbia University who has studied the Great Recession, told Bloomberg. “It's the biggest asset class and is directly linked to household budgets, which means it carries consequences for consumption. It’s a large recession risk.”

Remote work and lifestyle changes have created ripple effects throughout CRE, leaving commercial owners at risk and adding to the likelihood of fire sales, experts told Bloomberg.

Multiple U.S. banks have also forecast an increase in credit losses this year. Bank of America predicted that an additional $1B of office property loans will have elevated risk of default or missed payments in 2023.

Many CRE players across the globe faced difficulties in refinancing projects during the second half of 2022, with everyone from Legoland Korea’s developers missing debt payments to Brookfield warning that it may face obstacles refinancing two downtown Los Angeles towers. In late December, the owners of the famed Chicago Board of Trade Building, unable to refinance their $256M debt, handed the 44-story tower over to their lenders.