- Commercial real estate is confronting significant challenges due to lower occupancy rates and higher interest rates.
- Even in cities like Boston, you find lots of vacancies, up to 40% of buildings.
- A market correction is about to happen because of rising rates, and we've got to refinance these buildings, and many of them have no equity left in them.
- "So these banks are going to fail because up to 40% of their portfolio — I’m talking regional banks here — are in commercial real estate."
With lower occupancy rates and higher interest rates, commercial real estate is confronting significant challenges. And according to "Shark Tank" star Kevin O'Leary, a downturn in the sector could have repercussions beyond real estate.
"Many of these are office spaces that are in subgrade markets," O'Leary said in a recent interview with Fox Business. "But even in cities like Boston, you find lots of vacancies, you know, up to 40% of buildings. And the challenge is, in every other real estate cycle, when you have a correction, which is about to happen here because of rising rates, and we've got to refinance these buildings, and many of them have no equity left in them.
"So these banks are going to fail because up to 40% of their portfolio — I’m talking regional banks here — are in commercial real estate."
Bank failures were in the spotlight earlier this year. In March, the collapse of Silicon Valley Bank grabbed headlines. After the bank sold its Treasury bond portfolio, it incurred a substantial loss, causing depositors to question its liquidity, which led to a bank run. Amid the market upheaval, Silvergate Bank, First Republic Bank and Signature Bank also failed.
O'Leary isn't the only one to sound the alarm on commercial real estate (CRE).
In May, Moody's Analytics Chief Economist Mark Zandi posted on X, formerly Twitter, that "lots more CRE price declines are coming. CRE loan delinquencies and defaults are sure to increase, causing agita for the banking system."
The situation also caught the attention of Tesla Inc. CEO Elon Musk.
"We really haven't seen the commercial real estate shoe drop. That's more like an anvil, not a shoe," Musk said during an interview with former Fox News personality Tucker Carlson in April. "So the stuff we've seen thus far actually hasn't even — it's only slightly real estate portfolio degradation. But that will become a very serious thing later this year, in my view."
O'Leary's Take
While O'Leary issued a dire warning for commercial real estate and regional banks, he also provided suggestions.
In particular, he pointed out that with the rise of remote work reducing office occupancy, office buildings could be reimagined for other uses.
"Most of these cannot be used again as offices because the economy has changed. No one saw this coming, but up to 40% of people who work in small businesses don't return to offices anymore. So we have to repurpose this. You have to take an old office and turn it into a climate-controlled storage or a condominium," he told Fox Business.
O'Leary also noted that in places like New York, repurposing office buildings often requires zoning changes, and the policy framework there is "very difficult."
His suggestion? Tear them down.
"It may be better long term ... to actually tear these buildings down and rebuild new purpose — data centers, industrial, climate-controlled storage — that's where we have to do it," he said.
Story by Jing Pan - Redacted bullet points by Jody Davis https://finance.yahoo.com/news/banks-going-fail-kevin-oleary-163719357.html?guccounter=1
