Rising interest rates, the prevalence of remote work, and the dominance of e-commerce sellers have combined to batter the commercial real estate market over the past few years. In this new environment, vacancy rates for office and retail space have soared, crimping owners, rents have plummeted, and borrowing costs have soared. As a result, U.S. commercial real estate prices have fallen 11% since the Federal Reserve began raising interest rates in March 2022, the worst drop in more than 50 years, the IMF reported last week.
The outlook for the industry is now so bleak that Howard Lutnick, the billionaire chairman and CEO of Cantor Fitzgerald, predicts between $700 billion and $1 trillion in defaults over the next two years unless interest rates fall rapidly, which he sees as unlikely.
“I think the real estate market is going to be very tough over the next 18 months, two years,” Lutnick told Fox Business last week, arguing that a “generational shift” is happening in the industry.
He points out that, according to the Mortgage Bankers Association, there is an estimated $1.2 trillion in commercial real estate debt coming due through the end of 2025, with 25% of it held by distressed operators of office and retail space. Interest rates have risen by more than 5 percentage points over the past two years, which is driving defaults.
Lutnick, who is also chairman and CEO of brokerage and fintech firm BGC Partners, warned that the Fed's rate hikes are like a “pressure roller” that will hurt the real estate market and the economy.
As Fortune previously reported, some real estate experts worry that rising defaults in commercial real estate could set off a vicious cycle that could affect the regional banks most involved in the sector and ultimately the economy as a whole.
In a Jan. 18 report, the IMF detailed its concerns about a self-doom loop, warning that financial regulators “must remain vigilant” to ensure that problems in the commercial real estate sector do not become economy-wide problems.
“Rising delinquencies and defaults in this sector could restrict lending, setting off a vicious cycle of tightening financing terms, falling commercial property prices, and losses for financial intermediaries, with adverse effects on the broader economy,” the IMF economists explained.
Still, Lutnick said he believes the economy can handle the commercial real estate market's problems, no matter how severe they are. Rising real estate defaults and rising interest rates will lead to a “slower economy” over the next few years, but not enough to cause a recession. “The economy will hold up,” Lutnick said. “I've been impressed with how the economy has held up so far.”
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