Despite the prospect of the Federal Reserve reversing its rate hikes, a banking executive on Wednesday offered a bleak outlook for the real estate market.
What Happened: The U.S. real-estate market is likely to remain “very ugly” over the next two years, said Cantor Fitzgerald CEO Howard Lutnick in an interview with Fox News. The CEO was speaking on the sidelines of the World Economic Forum, held in Davos, Switzerland.
Loan sales are going to be a huge business when mortgages on commercial buildings come due, the CEO said, adding that a trillion is due in the next two-and-a-half years.
“Real estate equity, REITS, are going to be in trouble … a lot of them are going to be wiped out, so many defaults, I think,” he said.
Lutnick also warned of looming massive loan defaults.
“I think $700 billion could default … the lenders are going to have to do things with them. They're going to be selling. It's going to be a generational change in real estate coming, end of 2024 and all of 2025. We will be talking about real estate being just a massive change, $700 billion to $1 trillion in defaults coming," he said.
"I think it's going to be a very, very ugly market in owning real estate over the next ….18 months, two years," he added.
In regards to the economy, Lutnick said it would be slower, while opining that there would unlikely be a recession. He said he sees only a slight downward move in rates this year.
“We are going to get a little bit lower rates, lower rates are not going to save the day because we’re going to four-and-a-half, or four-and-three-quarters,” the banking executive said
“Basically speaking you’re going to see huge losses in real estate equity, gains at the banks… the banks are… going to make money going forward and I think the economy will hang tough.”
See Also: Best Commercial Real Estate ETFs
Why It’s Important: About $2.77 trillion of commercial real estate debt, accounting for half of all outstanding commercial real estate debt, is set to mature between 2023 and 2027, with $500 billion of maturing this year, according to commercial real estate and banking data analytics company Trepp.
Refinancing this debt could be a challenge for borrowers due to declining property values and a high interest-rate environment. The Fed funds target rate is currently at a 22-year high of 5.25%-5.50%, with no clear direction regarding the timing for unwinding these hikes.
“Commercial real estate is experiencing a meaningful repricing as cap rates correlate to long-term to interest rates,” Morgan Stanley said in a recent report. “Patience is required while refinancing to higher debt costs gradually triggers valuation adjustments,” it added.
Fitch said in a report released in late December that it expects the greatest decline in property net cash flows from office and non-trophy malls due to increased maturity default stemming from macroeconomic headwinds and high interest rates.
It expects U.S. CMBS loan delinquencies to double from 2.25% in November 2023 to 4.5% in 2024 and 4.9% in 2025. Office availability was at an all-time high and office transaction sales prices were falling in central business districts, it said.
The Real Estate Select Sector SPDR Fund XLRE ended Friday’s session up 0.97% at $38.70, according to Benzinga Pro data. It has shed about 3.4% so far in January, reversing some of the 12.4% gain it made in 2023.
Read Next: Best REITs to Buy
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