(Bloomberg) -- The amount of money put aside by Aareal Bank AG for souring loans jumped in the fourth quarter as the German lender braced for worsening real estate markets.

Loan loss provisions in the final quarter of last year amounted to €179 million ($194 million), a roughly eightfold increase on the previous year’s period, Aareal said in a statement on Thursday. That was largely due to US office property financings, it said. 

“The US office property market turned out to be more challenging than originally anticipated around the end of the year,” Aareal said in the release. It added that is also booked provisions for a planned “significant reduction” in US office non-performing loans, which could kick off as soon as in the current quarter.

Aareal’s exposure to US commercial real estate has been in the center of investor scrutiny since the start of the month after several lenders elsewhere with large volumes of loans in the sector massively ratcheted up their risk provisioning. The German bank has since suffered a credit rating downgrade and some of its bonds have dropped heavily.

Property markets have been roiled by the rapid increases in interest rates, which have saddled owners with surging borrowing costs and plunging valuations. US office buildings have been particularly hard hit as workers are slow to return to offices, leaving some owners struggling to service their debt.

The volume of office loans designated as performing was €8.5 billion at the end of last year, with 36% of that exposure located in the US, Aareal said on Thursday. Its total CRE portfolio amounted to €32.5 billion.

The planned reduction of €500 million in non-performing loans will happen through “a bouquet of instruments,” Chief Executive Officer Jochen Kloesges said at a press conference. Ways to do that can include selling the loan or restructuring it, he said, adding that another option is a capital injection by the property owners, potentially in combination with “concessions” made by Aareal.

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Aareal, which is backed by investors including Advent International and Centerbridge Partners, “expects the environment in the US office property market to remain challenging” this year, it said in the release. It still expects operating profit for the group to more than double to at least €300 million.

A big part of the increase is likely to come from Aareal’s Aareon unit, which spent a lot of money on investments last year. Those won’t repeat, the lender said, potentially pushing the unit from a pretax loss of €72 million in 2023 to an expected pretax profit of about €50 million in the current year.

The big jump in Aareal’s credit provisions for loans to US office properties last year comes after it set aside €134 million for its Russia exposure in 2022, when the country invaded Ukraine. The lender has exited that exposure completely, it said on Thursday. 

(Updates with CFO comment in seventh paragraph and context throughout)

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