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“Shark Tank” star Kevin O'Leary believes the commercial real estate sector is on the brink of collapse, which will have ripple effects that will negatively impact investors and small business owners. He spoke about this “unique situation” during a recent appearance on “Kudlow.”
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Here's everything you need to know about the current state of commercial real estate and its impact on the economy.
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Shift away from face-to-face operations will lead to more bank failures
While large companies are moving toward a return to office work, small and medium-sized businesses are not, and in many cases, office buildings remain vacant.
“A lot of this office space is in the lower-grade market, but even in cities like Boston, up to 40% of buildings are vacant,” O'Leary said. “The challenge is that when there's a correction in every other real estate cycle (which is about to happen here because of rising interest rates), these buildings have to be refinanced. Many buildings don't have any equity left.”
This will create serious problems for local banks that have investments in these buildings.
“These banks will fail because up to 40% of their portfolios are commercial real estate,” O'Leary said.
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Commercial properties need to be repurposed, which can be difficult
Mr O'Leary said the commercial property market was currently in a “unique” situation, with the market expected to never return to pre-pandemic levels.
“It's something unique that just appeared on the radar screen. [is that] Most of these cannot be reused as offices. [space] “The economy has changed,” he said. “Nobody expected this. But up to 40% of people who work for small businesses are not back in the office anymore. So we have to repurpose this.”
O'Leary points out that while these properties could theoretically be converted into storage space or housing, this is easier said than done.
“You can't do that without zoning changes and policies. [changes]“It’s very difficult, so in the long run it may be better to actually demolish these buildings and rebuild them. [them for a] New uses, data centers, industrial HVAC. We have to do it, but who's going to pay for it? That's the question, because we're talking about a trillion dollars in total. There's a big problem, and it's going to show up in these regions. [banks] For the next 36 months.”
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O'Leary also noted that many of these buildings are no longer economically viable.
“Most of these buildings were built in the last 30 years. [have mortgages with] “Interest rates are below 4 percent,” he says. “Now the Fed has raised final interest rates to 5.5 percent, which means these mortgages are refinancing at 9 percent to 11 percent, which means they're three times the cost. So a lot of these buildings are going to become economically unviable.”
Commercial real estate problems hit small business owners
As local banks feel the effects of the commercial real estate collapse, the impact will trickle down to small business owners who typically seek loans from these banks.
“The spinoffs that are causing chaos right now are regional bank loan balances,” O'Leary said. “Regional banks are not lending because they're not lending to small businesses because of capital call requirements imposed by the pressures on commercial real estate.” […] So community banks are under pressure, commercial real estate is collapsing, small businesses can't get capital. It's all bad news.”
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This article originally appeared on GOBankingRates.com: Kevin O'Leary Says Future Real Estate Collapse Will Lead to “Disruption” — What You Need to Know