“Shark Tank” star Kevin O’Leary is issuing a warning about an impending economic crisis in the commercial real estate industry.
In an appearance on FOX Business’ “Varney & Co,” O’Leary voiced his concerns: Real estate stocks are beginning to plummet and businesses have become “uneconomic” due to inflation and rising debt ceilings.
“It’s getting worse by the week, and lots of private equity firms are admitting there’s cracks in the system,” he said. “It’s based on debt … The debt was raised for these buildings back at 3, 4 and 5%, now they’re dealing with 9 to 14% and refinancing them.”
“Here’s what’s unique,” the entrepreneur said, “Most of these office units 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.”
He also pointed out that property values on these commercial buildings have tanked, coupled with the fact that the U.S. will be facing roughly $1.5 trillion in commercial mortgage debt by the end of 2025.
O’Leary believes the issue will manifest itself in the regional banking sector as well. “These banks are going to fail,” he said, “because up to 40% of their portfolios … are in commercial real estate.”
He is not the only one. These concerns have been echoed across the business community for several months, and they seem to hinge on the same issues: rising interest rates and plunging demand for office spaces.
According to data by Statista, over 16% of office spaces around the country were vacant in Q1 of 2023, with percentages climbing as high as 30% in major U.S. markets like San Francisco and New York City.