‘Shark Tank’ Star Warns Real Estate Death Ring ‘Not Getting Better’

The commercial real estate industry is on the verge of “collapse,” according to one “Shark Tank” star.

The doom loop facing commercial real estate “has not gotten better,” O’Leary Ventures CEO Kevin O’Leary explained on “Kudlow” on Friday.

“What’s unique about this situation, and I’ll just point it out, is that a lot of these spaces are office space that’s in lower-quality markets…but even in cities like Boston, you find a lot of vacancies, you know, up to 40,” O’Leary said. % of buildings.

Remote work could wipe $800 billion off the value of office buildings by 2030

In cities across the country, office buildings in particular have been largely vacant since the coronavirus shutdowns, with companies relying more on remote work or hybrid models. Demand for office space has continued to contract since 2020.

A study published by McKinsey in July looked at real estate in nine “super” cities – San Francisco, New York, Houston, London, Paris, Munich, Tokyo, Beijing and Shanghai – and estimated that office attendance is currently about 30% lower than the average. Attendance in offices. Typical pre-pandemic level seen in 2019.

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Demand may revive in the coming years, but the consulting company expects attendance to remain about 13% lower in 2030 than it was before the pandemic began.

The commercial real estate collapse continues to loom over the US economy

The massive decline in demand will eventually cause real estate values ​​to decline. On average, the total value of office space in the nine cities could decline by 26% from 2019 to 2030 – or a decline of about $800 billion.

“Most of them can’t 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 go back to their offices anymore. So we have to repurpose that. You have to take an office “Old years and you turn it into climate-controlled storage or an apartment but in cities like New York, where they’re being torn down in these duplexes, they’re just empty. You can’t do that without changing zoning. And the politics there are very difficult.”

O’Leary even questioned whether rebuilding or repurposing the commercial space would be possible given what he estimates would be “a million dollars in total.”

He warned that “there are major problems, and they will become evident in these regional conferences during the next thirty-six months.”

The crisis facing commercial space extends beyond just properties such as office space. O’Leary warned that the looming collapse in commercial real estate would spill over into regional banks.

“The challenge is, in every other real estate cycle, when there is a correction, which is about to happen here because interest rates are rising, we have 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 portfolios, and I’m talking about regional banks here, are in commercial real estate.”

Fed calls on growing regional banks to take corrective action: report

Small and regional banks are the largest source of credit for the $20 trillion commercial real estate market, and hold about 80% of the sector’s outstanding debt. Regional banks have been at the epicenter of turmoil within the financial sector, and there are fears that the turmoil could worsen the crisis. Lending standards are significantly more restrictive.

During a credit crunch, banks raise their lending standards dramatically, making it difficult for businesses or households to obtain loans. Borrowers may have to agree to more stringent terms such as higher interest rates as banks try to reduce financial risks on their part.

Even before the collapse of Silicon Valley and Signature Bank in early March, the commercial real estate market was struggling with a number of challenges, including rising interest rates and declining demand for office space as more companies allowed employees to work from home.

O’Leary also warned that the “chaos” in commercial real estate could have a worse ripple effect on small businesses outside the housing industry.

“The spin-offs that are causing the chaos right now are those loan books and the regional banks,” he noted, adding that they “don’t make loans.”

Real estate experts say challenges for buyers and sellers are ‘greatest of all’

The “Shark Tank” star also pointed to the recent pause in employee retention credit. The IRS’s decision last week to temporarily stop accepting refund claims was largely due to concerns about fraud in the program.

“I would tell everyone that every government program that has an application involves fraud. But 90% of the people who apply for this program are good men and women and small businesses in America. It’s probably as high as 95%. And so the IRS, because they’re concerned, and I understand their concern About the 5% or whoever are making these fraudulent claims, they shut the whole thing down for three months.

OLeary Ventures boss Kevin O’Leary issues a warning about commercial real estate and reveals how its collapse could impact banks and small businesses.

The Employee Retention Credit was a coronavirus-era tax credit designed to help small businesses retain employees and maintain at least partial operation during the pandemic. While the credit expired in October 2021, businesses were allowed to apply retroactively until the IRS moratorium went into effect.

Since the program began, the IRS has received 3.6 million claims; However, among those claims there are an increasing number of requests that are considered fraudulent.

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While the commercial real estate industry has not hit rock bottom, O’Leary warns that the worst is yet to come.

“There’s another company you’ve never heard of, but it’s still surviving because of the employee retention credit. These programs are not compatible. They’re not in sync. So we’re getting pressure from regional banks, commercial real estate.” Real estate collapses and small businesses don’t get any capital. . “This is all bad news.”

FOX Business’ Megan Heaney contributed to this report.

Original article source: ‘Shark Tank’ Star Warns Real Estate Death Ring ‘Not Getting Better’

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