- The real estate market looks like a “slow moving train wreck” as a massive default looms, experts told Fox Business News.
- Howard Lutnick said a $700 billion default is likely with huge pile of commercial real estate debt due.
- “The Fed will have to cut rates because that’s what’s creating the problem.”
The US economy may be going strong, but the commercial property market is still in trouble.
That’s because a ton of commercial real estate debt due last year ended up being extended into 2024, but things aren’t looking much sunnier today with interest rates still high and work-from-home trends keeping office prices depressed.
Experts have been sounding the alarm for months, and the warnings are growing more dire.
“This is a slow moving train wreck,” market expert and “The Bear Trap Report” founder Larry McDonald told Fox Business News on Tuesday.
A $2.2 trillion mountain of commercial real estate debt is expected to mature by 2027, bringing a wave of potential distress as landlords refinance buildings at much higher rates. As values plunge for many properties, especially in the office sector, owners could be forced to inject more equity into the property or give the keys back to the lender.
According to McDonald, the trillions in real estate debt barreling toward maturity, along with a $1.9 trillion pile of corporate debt, will force the Fed to cut rates this year.
The real source of distress for commercial mortgages is office space.
In Washington D.C., about 25% of office space is occupied on a peak day, Don Peebles, CEO of Peebles Corporation, said in the same interview, and New York City has about 10 empire-state-buildings-worth of vacant space.
“What happened is that it was a one-two punch,” Peebles said. “Covid changed how people work […] and then interest rates ran up very rapidly. So there was no way out. Lower interest rates will save some buildings, some property owners, but not a majority of them. But the Fed will have to cut rates because that’s what’s creating the problem.”