FRANKFURT, May 16 Reuters Commercial property has become the weak link of the euro zone39;s financial system, with losses there threatening to hurt banks, insurers and funds, a European Central Bank report showed on Thursday.

Commercial real estate CRE companies have been hit by a triple whammy of higher borrowing costs, falling demand for office space in the postpandemic age, and more expensive building materials.

Their problems are now starting to spread to their backers in the form of rising default rates on loans and looming losses on investments, the ECB said in its twice yearly Financial Stability Review FSR.

The central bank for the 20 countries that share the euro said commercial property prices were down 8.7 yearonyear at the end of 2023 and may have further to fall.

Prices could decline further, given structurally lower demand for some CRE assets postpandemic, the ECB said. The outlook for the office market is particularly bleak.

The sector was a sour note in an otherwise more positive FSR, in which the ECB noted the risk of a recession had declined despite lingering geopolitical risks.

The central bank said around half of the euro zone39;s large real estate companies were making losses and their ability to make interest payments from earnings had declined substantially.

While commercial property only accounted for a small portion of all loans, the ECB said a handful of banks had already suffered a significant deterioration in their CRE portfolios,…