Kevin O’Leary, known for his role on the popular show “Shark Tank,” has sounded the alarm on the impending collapse of the commercial real estate sector. In a recent episode of “Kudlow,” O’Leary warned that this collapse would have ripple effects that will be detrimental to investors and small business owners. So, what exactly is happening in the commercial real estate market, and what are the broader economic impacts?
One of the main factors contributing to this potential collapse is the shift away from in-person work. While many large companies are returning to in-office work, small businesses are not following suit. As a result, office spaces are remaining vacant across the country. O’Leary highlighted that even cities like Boston have up to 40% vacancy rates in commercial buildings.
The challenge arises when these buildings need to be refinanced during a real estate correction. Many of these buildings have no equity left in them, which poses a serious problem for regional banks. O’Leary predicts that regional banks, whose portfolios heavily rely on commercial real estate, will fail as a result.
Furthermore, the pandemic has brought about permanent changes to the economy, making it unlikely for these commercial real estate properties to be used as office spaces again. O’Leary pointed out that up to 40% of small business employees do not plan to return to offices. This necessitates the repurposing of these buildings, which is easier said than done. Zoning changes and policy adjustments are required, making it challenging to convert vacant office spaces into storage units or housing.
O’Leary acknowledged that tearing down these buildings and rebuilding them for a new purpose, such as data centers or industrial climate-controlled storage, might be the more viable option in the long term. However, the question remains: Who will finance these trillion-dollar endeavors?
Another factor contributing to the potential collapse is the rising interest rates. Many of these commercial buildings were constructed within the last 30 years, with mortgages at interest rates below 4%. With the Federal Reserve raising rates to a terminal rate of 5.5%, refinancing these mortgages at 9% to 11% becomes economically unviable for many building owners.
The collapse of the commercial real estate market will have significant implications for small business owners. As regional banks struggle with their portfolios, which heavily rely on commercial real estate, they will be less likely to provide loans to small businesses. This lack of capital for small businesses could further exacerbate the economic turmoil caused by the collapse.
Overall, O’Leary’s warning highlights the fragile state of the commercial real estate sector and the potential economic impacts it may have. As vacant office spaces continue to pile up and regional banks face increasing vulnerabilities, the future of commercial real estate remains uncertain. Small business owners and investors must prepare for the potential fallout and seek alternative strategies to navigate these challenging times.