The U.S. real estate market is facing a challenging period ahead, according to Cantor Fitzgerald CEO Howard Lutnick. Speaking at the World Economic Forum in Davos, Switzerland, Lutnick painted a bleak picture for the industry, predicting a “very ugly” market over the next two years.
Lutnick highlighted the issue of loan sales when mortgages on commercial buildings come due, stating that a trillion dollars’ worth of loans are set to mature in the next two-and-a-half years. He warned that real estate equity and real estate investment trusts (REITs) are likely to be in trouble, with many facing defaults.
Moreover, Lutnick raised concerns about massive loan defaults, estimating that $700 billion could default. He suggested that lenders will have to take action, with a massive change in the real estate market expected by the end of 2024 and throughout 2025.
The CEO’s pessimistic outlook on the real estate market comes despite the possibility of the Federal Reserve reversing its rate hikes. Lutnick stated that lower interest rates are unlikely to save the day, as rates are expected to remain relatively high.
The challenges facing the real estate market are not to be taken lightly. Approximately $2.77 trillion of commercial real estate debt, half of all outstanding commercial real estate debt, is set to mature between 2023 and 2027. The refinancing of this debt could prove to be difficult due to declining property values and a high interest-rate environment.
Morgan Stanley recently noted that commercial real estate is experiencing a meaningful repricing as capitalization rates correlate to long-term interest rates. The investment bank cautioned that patience will be required during the refinancing process, as higher debt costs gradually trigger valuation adjustments.
Fitch Ratings also expressed concern about the deterioration of U.S. commercial real estate. It anticipates an increase in loan delinquencies, particularly in the office and non-trophy mall sectors, due to macroeconomic headwinds and high interest rates. The rating agency expects U.S. CMBS loan delinquencies to double by 2024 and 2025.
Despite the challenges ahead, it is important to note that the real estate market is not the only factor that determines the overall health of the economy. Lutnick suggested that the economy would slow down but did not anticipate a recession. He also mentioned a slight downward move in rates for this year.
In conclusion, the real estate market in the U.S. is projected to face significant challenges in the coming years. Loan sales, defaults, and the refinancing of commercial real estate debt are some of the issues that the industry will have to navigate. However, it is important to remember that the real estate market is just one component of the broader economy, and other factors will also influence its performance.
