Expert sounds alarm on high interest rates being the 'new normal,' leaving real estate 'extremely challenged'

One market expert is sounding the alarm over higher interest rates being the "new normal" and leaving the commercial real estate space feeling "extremely challenged."

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On "Varney & Co." on Wednesday, Key Advisors Group, LLC owner Eddie Ghabour warned consumers to prepare for the economic baggage that comes with another "six to eight months" of rate hikes, declaring that he is "concerned" for the real estate market. 

"We've been talking about this for months, and I think the commercial space is going to be extremely challenged, because the other thing is with this debt, these commercial loans aren't locked in for 30 years like a residential loan is," Ghabour explained to host Stuart Varney.

"They have to refinance this debt. So, when you're starting to see rentals going away, and you got to refinance that debt at maybe double the rate, you know, it's mathematically challenging to be able to support that. So you're going to see more and more defaults in that, and then you worry about it spilling into other sectors," he continued.

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Five to 10 office towers each month join the list of properties at risk of defaulting because of low occupancy, expiring leases or maturing debt that would have to be refinanced at a higher rate, according to Manus Clancy, senior managing director with data firm Trepp Inc.

The feeble return-to-office rate has led to soaring vacancy levels in many cities. Last year’s spike in interest rates increased the cost of buying and refinancing properties and squeezed property values. Until now, most landlords have been able to stay current on their mortgages because office leases typically run for 10 years or more, and lenders have been willing to extend expiring mortgages. 

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The delinquency rate for office loans that back commercial-mortgage-backed securities remains low, but it is heading higher. The rate last month rose by a quarter of a percentage point to 1.83%, its largest increase since December 2021, according to Trepp.

Ghabour continued, urging consumers to extinguish the belief that the Federal Reserve is going to bring rates down and "save the day."

"No one alive managing money has ever seen anything like this before. We've never had tightening this fast. We've never seen a bubble as big as the one we had in 2021, and we now have to get through that. And lastly, we've been conditioned to believe that the Fed is going to come in and save the day and rates are going to come down. We have to erase that from our mind. We are now going to be in a new normal of higher rates for the foreseeable future," he said. 

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Conversely, Fed Chair Jerome Powell warned earlier this month that raising interest rates to slow the economy "are not popular" in the short term, and could even create political opposition.

"Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time," Powell said in remarks prepared for delivery at a conference held by Sweden's central bank. "But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy."

Ghabour concluded by issuing an economic warning to consumers. 

"And that means valuations have to get reset. And unfortunately, there's going to be a recession, companies going out of business and that's the normal cycle. And then we can restart, recalibrate and back to business as usual," he said.

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The Wall Street Journal's Peter Grant and FOX Business' Kristen Altus contributed to this report.