Concerns are mounting around the health of Europe’s commercial real estate market, with some investors questioning whether it could be the next sector to blow following last month’s banking crisis.

Higher interest rates have increased the cost of borrowing and depressed valuations in the property sector, which in recent years reigned supreme amid low bond yields.

Meanwhile, the collapse in March of U.S.-based Silicon Valley Bank and the later emergency rescue of Credit Suisse prompted fears of a so-called “doom loop,” in which a potential bank run could trigger a property sector downturn.

The European Central Bank earlier this month warned of “clear signs of vulnerability” in the property sector, citing “declining market liquidity and price corrections” as reasons for the uncertainty, and calling for new curbs on commercial property funds to reduce the risks of an illiquidity crisis.

Already in February, European funds invested directly in real estate recorded outflows of £172 million ($215.4 million), according to Morningstar Direct data — a sharp contrast from the inflows of almost £300 million seen in January.

Analysts at Citi now see European real estate stocks falling by 20%-40% between 2023 and 2024 as the impact of higher interest plays out. In a worst-case scenario, the higher-risk commercial real estate sector could plummet 50% by next year, the bank said.

The office segment — a major component of the commercial real estate market — has emerged as central to potential downturn fears given wider shifts toward remote or hybrid working patterns following the Covid pandemic.

“People are concerned that the back-to-office hasn’t really materialized, such that there are too many vacancies and yet there is too much lending in that area, too,” Ben Emons, principal and senior portfolio strategist at U.S.-based investment manager NewEdge Wealth, told CNBC’s “Squawk Box Europe” last month.

That has deepened worries about which banks may be exposed to such risks, and whether a wave of forced sales could lead to a downward spiral.

According to Goldman Sachs, commercial real estate accounts for around 25% of U.S. banks’ loan books — a figure that rises to as much as 65% among smaller banks, the focus of recent stressors. That compares to around 9% among European banks.

“I think people are trying to understand which banks have lent where, to what sector, and what’s really the ultimate risk here,” Emons added.

Amid that uncertainty, and what it called stretched valuations, Capital Economics last month increased its forecast for a peak-to-trough euro zone property sector correction from 12% to 20%, with offices expected to come off worst.

“We see this financial distress, or whatever you want to brand it, as a catalyst for a deeper adjustment in value than we previously expected,” Kiran Raichura, Capital Economics’ deputy chief property economist, said in a recent webinar.

Not everyone is convinced of a forthcoming downturn, however.

Pere Vinolas Serra, chief executive of Spanish real estate company Inmobiliaria Colonial and chairman of the European Public Real Estate Association (EPRA), said the situation in Europe looks paradoxically strong.

Among the various factors at play, the return-to-office trend has been stronger in Europe than the U.S., he said, while office “take-up” — or occupancy — rates have been higher on the continent.

“What is striking is that the data shows it’s better than ever,” Vinolas told CNBC via Zoom. “There’s something totally different going on in the U.S. versus Europe.”

As of late 2022, European office vacancy rates stood at around 7%, well below the 19% in the U.S., according to real estate adviser JLL. Within Inmobiliaria Colonial’s portfolio, Vinolas said current vacancy rates were even lower, at 0.2% in Paris and 5% in Madrid.

“I’ve never seen that in my life. The data on occupancy rates is at the very highest level,” Vinolas said.

JP Morgan mirrored that view late last month, saying in a research note that fears of a U.S. downturn spreading to Europe were overblown.

“Fundamentally, we believe that any contagion from either U.S. banks or U.S. CRE (commercial real estate) onto European peers is not justified, given different sector dynamics,” analysts at the bank said.

Still, uncertainties remain in the sector, analysts warned.

Of particular concern is the concentration of funding from non-bank lenders — or so-called shadow banks — which have picked up the slack in the wake of tighter regulation on traditional banks, said Matthew Pointon, senior property economist at Capital Economics.

Prior to the global financial crisis, Europe’s traditional banks would offer loans of 80% of a building’s value. Today, they rarely go above 60%.

“A lot less is known about these [shadow banks], and they may be more vulnerable to rising interest rates for example. So that’s an unknown that could throw a spanner in the works,” Pointon said.

Meantime, incoming EU and U.K. energy efficiency standards will require significant investment, particularly in older buildings, and could see some real estate owners come under further pressure over the coming years.

“I think the challenge will be for those non-sophisticated players, those who have a building that they have to adapt to new requirements,” Vinolas said.

“At that level — which is a large amount, by the way — there could be a huge impact but also huge opportunities,” he added.