A New York Times bestselling author and a real estate entrepreneur have started to echo similar warning signs amid “massive” issues within the commercial sector.
“It’s a slow-moving train wreck,” The Bear Traps Report founder Larry McDonald said on “Mornings with Maria” Tuesday. “This is why the Fed is the beast in the market, it has the Fed by a stranglehold because it’s close to $2 trillion of maturities in the commercial real estate space. And then, if you look at high-yield leverage loans and investment grade bonds in the U.S. corporate market, it’s another $1.9 trillion. So the Fed is going to be forced this year to cut rates dramatically.”
“These buildings cannot service the debt,” Peebles Corporation founder and CEO Don Peebles added on the panel. “They’re worth a fraction of what the original values were when these loans were made. And you’re going to see massive defaults because there’s no solution in many of these instances.”
Their comments are strikingly similar to Cantor Fitzgerald CEO Howard Lutnick’s warning last week that a “generational” shift was on the horizon, painting a “very ugly” picture for America’s real estate market in 2024.
“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,” Lutnick stressed to Maria Bartiromo at the World Economic Forum in Davos.
The factors causing default worries is “two-fold,” Peebles explained: “One, that these buildings, the contract vacancy rates have increased significantly, up to about 20% in places like New York City, for example. And then of that remaining 80%, less than half of it gets occupied. And that’s because there’s been a seismic shift on how people work and where they are working.”
McDonald agreed with Peebles’ analysis, and both argued the “only way” to help the situation and slow down the default process is with “aggressive rate cuts” from the Federal Reserve.
“What happened was a one-two punch. COVID changed how people work. The fundamentals were going against New York, Washington, D.C., Chicago and other places. And then interest rates ran up very rapidly, so there was no way out,” Peebles noted. “I think that lower interest rates will save some buildings. They will save some property owners, but, not a majority of them.”
“I completely agree,” McDonald chimed in. “I think somewhere between like March, April, May, the probability of a soft landing in the eyes of Wall Street is going to come down dramatically. And that beast in the market, because of this emerging credit risk, all these maturities within the next two years, that eventually triggers a significant rate cut in the middle of the year.”
“And remember, this is the most progressive Fed we’ve ever seen,” McDonald continued. “It’s a very left-leaning Fed. So they’re going to try to help the current White House. They’ll do everything possible.”