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Billionaire CEO sees $1 trillion in commercial real estate defaults coming for 'very, very ugly market' over next 2 years – Fortune

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10 months ago

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Rising interest rates, the remote work trend, and the dominance of e-commerce sellers have combined to hammer the commercial real estate market over the past few years. Sky-high office and retail space vacancies are plaguing owners in this new environment, rents are plummeting, 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 IMF reported last week, the worst decline in over 50 years.

The outlook for the sector is now so bleak that Cantor Fitzgerald’s billionaire chairman and CEO Howard Lutnick is predicting between $700 billion to $1 trillion of defaults over the next two years unless interest rates fall quickly—and he sees that as unlikely.

“I think it’s going to be a very, very ugly market in owning real estate over the next 18 months, two years,” Lutnick told Fox Business last week, arguing that there’s going to be a “generational change” in real estate.

To his point, there’s an estimated $1.2 trillion in commercial real estate debt maturing by the end of 2025, according to the Mortgage Bankers Association, and 25% of that debt is in the hands of struggling office and retail space operators. With interest rates rising more than 5 percentage points in the past two years, that’s a recipe for defaults.

Lutnick, who is also the chairman and CEO at the brokerage and fintech company BGC Partners, warned that the Fed’s interest rate hikes are like a ”steamroller” that is hitting the real estate market and the economy.

As Fortune previously reported, some real estate experts fear that rising commercial real estate defaults could trigger a doom loop that impacts regional banks with the most exposure to the sector, and eventually the entire economy.

In its Jan. 18 report, the IMF detailed its own doom loop fears, warning that financial supervisors “must continue to be vigilant” in order to ensure that the commercial real estate sectors’ issues don’t become an economy-wide problem.

“Rising delinquencies and defaults in the sector could restrict lending and trigger a vicious cycle of tighter funding conditions, falling commercial property prices, and losses for financial intermediaries with adverse spillovers to the rest of the economy,” IMF economists explained.

Still, Lutnick said he believes the economy can cope with the issues in the commercial real estate market, however dire. Rising real estate defaults and higher interest rates will lead to a “slower economy” over the next few years, but they aren’t enough to cause a recession. “I think the economy will hang tough,” Lutnick said. ”I’m impressed with how it’s been hanging tough.”

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Unlock Reliable U.S. Real Estate Opportunities with Oak Street Partners

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1 day ago

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November 20, 2024

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OAK STREET PARTNERS UNLOCKING OPPORTUNITIES  FOR CANADIAN INVESTORS IN THE U.S. RENTAL HOUSING MARKET

Oak Street Partners is leading the way in cash-flow-focused U.S. affordable housing investments

TORONTO, ON | NOVEMBER 18, 2024 – With the Canadian real estate market facing challenges and declining opportunities for investors, Oak Street Partners, a Toronto-based private real estate investment firm, is offering a new avenue for Canadian investors to diversify into the U.S. rental housing market. Oak Street Partners enables investors to passively invest in U.S. affordable housing, providing them with stable, cash-flow-focused returns while helping meet the growing demand for quality, affordable housing in the United States.

“Market conditions in Canada have made it more difficult for investors to find reliable, income-generating opportunities,” says Parker Christie, Founder & CEO of Oak Street Partners. “By turning to the U.S. affordable housing market, we’ve been able to create consistent, cash-flowing investments that benefit both our investors and local communities.”

Building on this approach, Oak Street Partners facilitates investment by strategically acquiring and managing properties in the U.S., particularly in the Midwest and Southeast regions. Investors provide capital, while Oak Street handles all aspects of property ownership and management. Similar to a Real Estate Investment Trust (REIT), but privately structured, Oak Street ensures investors receive stable, cash-flow-driven returns without the need for direct involvement.
A key part of Oak Street’s approach is leveraging the Section 8 Housing Choice Voucher Program, America’s largest federal rental subsidy program that pays private landlords rent on behalf of low-income tenants. This guarantees a reliable, high cash flow income stream, even when real estate markets are challenged with high interest rate environments. By leveraging this program, Oak Street is not only able to provide consistent returns to its investors, but it also enhances lower-income communities, creating sustainable, quality homes for residents.

“It’s a win-win situation,” explains Trumbull Fisher, Director of Oak Street Partners. “Tenants are able to secure and enjoy quality, affordable housing, while investors benefit from reliable, government-backed rental payments that ensure steady cash flow.”

By investing in these properties, Oak Street is able to support the demand for affordable housing, while also contributing to the broader social good by addressing housing shortages and improving community infrastructure. This dual focus on financial return and social impact is what makes Oak Street’s approach stand out in today’s real estate investment landscape.

In its first year of operation, Oak Street has acquired over 100 units in Ohio. With $10 million in assets under management, the company has been able to offer its investors a 10 per cent cash dividend, which was distributed nine months into its operation. This is a rare milestone for companies in their first year, as many real estate investment firms operate at a loss in their early stages.

“As we look to the future, our goal is to expand Oak Street’s portfolio in high-demand areas across the Midwest and Southeast,” adds Christie. “Our focus will remain on sourcing properties that deliver strong, stable returns while positively impacting local communities.”

For more information on Oak Street Partners visit oakstreetgp.com/.

ABOUT OAK STREET PARTNERS

Oak Street Partners is a real estate investment firm focused on creating diversified and stable opportunities for investors in the U.S. rental housing market. We offer a unique pathway for investors to build and expand their portfolios by investing in affordable housing opportunities, improving the quality of life for tenants while delivering consistent returns for investors.

Website: https://oakstreetgp.com/

LinkedIn: https://www.linkedin.com/company/oak-street-partners-gp

Instagram: https://www.instagram.com/oakstreetgp/

Email: info@oakstreetgp.com  n

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‘The Bidding War’ taps into Toronto’s real estate anxiety

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1 week ago

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November 12, 2024

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‘The Bidding War’ is a play skewering Toronto’s real estate market via a story about a one-day bidding war over the city’s last affordable home. The cast and crew say it exposes how the housing crisis brings out “the worst in people.” (Nov. 12, 2024)

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Greater Toronto home sales jump in October after Bank of Canada rate cuts: board

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2 weeks ago

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November 6, 2024

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TORONTO – The Toronto Regional Real Estate Board says home sales in October surged as buyers continued moving off the sidelines amid lower interest rates.

The board said 6,658 homes changed hands last month in the Greater Toronto Area, up 44.4 per cent compared with 4,611 in the same month last year. Sales were up 14 per cent from September on a seasonally adjusted basis.

The average selling price was up 1.1 per cent compared with a year earlier at $1,135,215. The composite benchmark price, meant to represent the typical home, was down 3.3 per cent year-over-year.

“While we are still early in the Bank of Canada’s rate cutting cycle, it definitely does appear that an increasing number of buyers moved off the sidelines and back into the marketplace in October,” said TRREB president Jennifer Pearce in a news release.

“The positive affordability picture brought about by lower borrowing costs and relatively flat home prices prompted this improvement in market activity.”

The Bank of Canada has slashed its key interest rate four times since June, including a half-percentage point cut on Oct. 23. The rate now stands at 3.75 per cent, down from the high of five per cent that deterred many would-be buyers from the housing market.

New listings last month totalled 15,328, up 4.3 per cent from a year earlier.

In the City of Toronto, there were 2,509 sales last month, a 37.6 per cent jump from October 2023. Throughout the rest of the GTA, home sales rose 48.9 per cent to 4,149.

The sales uptick is encouraging, said Cameron Forbes, general manager and broker for Re/Max Realtron Realty Inc., who added the figures for October were stronger than he anticipated.

“I thought they’d be up for sure, but not necessarily that much,” said Forbes.

“Obviously, the 50 basis points was certainly a great move in the right direction. I just thought it would take more to get things going.”

He said it shows confidence in the market is returning faster than expected, especially among existing homeowners looking for a new property.

“The average consumer who’s employed and may have been able to get some increases in their wages over the last little bit to make up some ground with inflation, I think they’re confident, so they’re looking in the market.

“The conditions are nice because you’ve got a little more time, you’ve got more choice, you’ve got fewer other buyers to compete against.”

All property types saw more sales in October compared with a year ago throughout the GTA.

Townhouses led the surge with 56.8 per cent more sales, followed by detached homes at 46.6 per cent and semi-detached homes at 44 per cent. There were 33.4 per cent more condos that changed hands year-over-year.

“Market conditions did tighten in October, but there is still a lot of inventory and therefore choice for homebuyers,” said TRREB chief market analyst Jason Mercer.

“This choice will keep home price growth moderate over the next few months. However, as inventory is absorbed and home construction continues to lag population growth, selling price growth will accelerate, likely as we move through the spring of 2025.”

This report by The Canadian Press was first published Nov. 6, 2024.

The Canadian Press. All rights reserved.

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