LONDON, March 5 (Reuters) - Major European banks have

been cutting their lending to commercial property and have half

the exposure of their U.S. peers, making U.S. lenders more

vulnerable as office prices plunge further, Morgan Stanley said

on Tuesday.

Commercial real estate (CRE) markets are in the grip of the

biggest downturn since the 2008-9 financial crisis as higher

borrowing costs and a spike in vacancy rates driven by more

people working from home hit demand for office space.

Morgan Stanley analysts said in a research note that

regional U.S. banks looked most exposed, alongside German

regional lenders - which unlike bigger European banks had been

increasing their exposure.

"Overall, we think CRE-related issues will not translate

into a systemic event, but rather a manageable earnings impact

localized to a small set of banks," the analysts wrote.

In a 'stress scenario', in which property price falls force

banks to recognise losses and borrowers' credit quality worsens,

European banks would face a 3% hit to earnings over three years,

which the analysts called "manageable".

That is especially the case as 70% of large-cap European

banks reduced their exposure since 2022 to around 5% of their

loan book, and nearly all lenders have sub-1% exposure to the

United States, where office vacancy rates are 21% versus 8% in

Europe, the analysts said.

By contrast, German regional banks have more than 20% CRE

exposure, with such loans accounting for most of the loan books

of specialist lenders Deutsche Pfandbriefbank and

Aareal, Morgan Stanley said.

Among large European lenders, Deutsche Bank has

the biggest CRE exposure to the U.S. market, but the analysts

said it was just 1.5% of its loans and that the bank had already

set some money aside to cover potential losses.

U.S. large cap banks have about 11% exposure, while mid-cap

lenders - some of which have seen their shares plunge in recent

weeks - have around 30%, they added.

Refinancing risks and vacancy rates have been "key concerns"

for the market globally, the analysts said, but they saw

"notable differences" between U.S. and European banks.

About $660 billion of CRE debt is set to mature in the

United States in 2024, against $150-$200 billion in Europe, they

estimate.

City office vacancy rates range from 32% and 27% in San

Francisco and Los Angeles respectively, to 9% in London and 5%

in Zurich, according to Morgan Stanley.