Housing market going into “very frightening time,” investor warns

A billionaire investor is sounding the alarm on the real estate market over a decade after he profited mightily off the housing market crash.

“Since we had the dotcom bust in 2002, we’ve had artificially depressed interest rates,” said Jeff Greene during an interview Friday with Fox Business. “So people have never had this experience of rates going up.

“I think you’re gonna have not just office buildings—people aren’t going to be able to afford to pay off their home loans that are due, or their apartment building loans. We are heading into a very frightening time in the entire real estate industry.”

He later said that these rising rates are occurring “before the slowdown,” warning of a possible recession.

Greene, 68, has a net worth of approximately $7.2 billion, according to Forbes. He accumulated his wealth by purchasing credit default swaps on subprime mortgage-backed bonds during the 2008 recession, and now reportedly holds much of his money in real estate in Los Angeles and South Florida—in addition to equities and other investments.

He is currently constructing two 30-story towers in West Palm Beach, Florida, which he describes as a “category killer…with big ocean views.”

“There’s millions of feet of office space, so when you build the best, newest one, you’ll get the tenants,” he said. “The problem is, the other buildings that have tenants are gonna lose them. As bad as it is for office space now, companies are going to be cutting back and reducing space.

“How about when AI starts to kick in? That’s gonna be a sledgehammer to white-collar jobs.”

J.P. Morgan and Co. reported in May that B- and C-class office buildings have an uphill battle, noting that the vacancy rate for distribution and warehouse space was 4.1 percent throughout the second half of 2022—a record low rate and one that has “steadily declined each quarter” dating back to the end of 2020. In the first quarter of 2023, the rate rose 10 basis points.

In the first quarter of 2023, average U.S. office vacancy rates in this year’s first quarter were 5.9 percentage points higher compared to the last quarter of 2019, according to fDi Intelligence, an English-language bi-monthly news and foreign direct investment publication. Simultaneously, 4.45 million square feet of new national office space translates to just 21.5 percent of the level of new space constructed during that last quarter prior to the COVID-19 pandemic.

Barbara Corcoran, known for her role as an investor on the TV show Shark Tank, recently echoed Greene’s concerns about rate increases, saying she anticipates “a bit of a bloodbath before it gets better.”

Andrew Lieb, an attorney who offers real estate legal services around the New York metro area, told Newsweek via email that higher interest rates are “generally devastating to the real estate world” not just because they depress demand by pricing out commercial buyers who count on leveraged offers.

Instead, he said the real risk posed by higher interest rates is with respect to owners who have adjustable-rate mortgages that will automatically adjust to much higher interest payments, without notice or option, and as a result destroy owners’ profit margins.

“Now, couple this phenomenon with lower use rates for city offices because of remote work and the replacement of workers with AI and, then, you have a recipe for disaster in the traditional, city, office market,” Lieb said. “However, there is not going to be an across-the-board downturn in real estate because the suburbs are still experiencing an increase in demand, from the COVID relocation effect, with work-from-home employees looking for a local office to escape their family from time to time.

“Additionally, mom and pop suburban landlords are often less leveraged than the city market because they have often owned the real estate for years rather than having purchased it as an investment in the first place.”

Austin, Texas, has drawn attention for home prices that have dropped by more than 10 percent between July 2022 and April 2023, compared to 1 percent nationally, according to the Zillow Home Value Index. It’s the biggest decline in the U.S., followed by San Francisco with a drop of 10 percent, Bend, Oregon, with a fall of 9.5 percent and Boise, Idaho, with a decrease of 9.3 percent.

Hybrid and remote work arrangements have left about 12.9 percent of office space vacant, reported Axios citing data by the CoStar Group.

Researchers at Stanford, Harvard and other institutions analyzed over 50 million job postings in March, determining that some 12.2 percent of job listings that specifically mentioned remote work were discovered—an increase of four times compared to the pre-pandemic days.

The industries with the most remote-hybrid work options available to them in 2022 were finance and insurance, professional and scientific, and information and IT.

Andrew Ragusa, a licensed real estate associate broker, told Newsweek via email that “there is an eerie unsettling feeling going around” because many people are knowingly overpaying for properties because they have no other choice.

“A lot of people are going to see their house value come down after a big crash but they’re all committed to monthly payments that are high and now have large loan balances,” Ragusa said. “It does not look good right now.”

A survey of 1,500 hiring managers by Upwork, a freelancing business marketplace, found that nearly 62 percent of companies have planned for a future of more remote work. The report also estimates that 36.2 million employees, or about 22 percent of all working Americans, will work remotely by 2025. That represents an 87 percent increase compared to the last quarter of 2019.