Kevin O'Leary, a Canadian businessman and investor on "Shark Tank," has warned of a potential commercial real estate market crash that could have detrimental effects on investors and small business owners.
Appearing in a recent episode of Kudlow, O'Leary said the commercial real estate market is on the brink of collapse as many office buildings remain vacant due to many companies' work-from-home schemes brought about by the COVID-19 lockdowns in 2020.
"What's unique about this situation, and I'll just lay it out, many of these are office spaces that are in sub-grade markets... But even in cities like Boston, you find lots of vacancies, you know, up to 40% of buildings," he said. "The challenge is, in every other real estate cycle, when you have a correction - which is about to happen here because of rising rates - we've got to refinance these buildings. Many of them have no equity left in them."
O'Leary noted that the high number of vacancies in commercial real estate will cause serious issues for regional banks that invested in commercial properties.
"These banks are going to fail because up to 40% of their portfolio, I'm talking regional banks here, are in commercial real estate," he added.
Can the Commercial Real Estate Market Bounce Back?
While the commercial real estate market is unlikely to bounce back to pre-pandemic levels, O'Leary said the buildings could be repurposed and converted into storage spaces or housing. However, he said this would be "very difficult" to do due to zoning and policy changes.
"You can't do that without zoning changes and policy [changes]. So it may be better long term to actually tear these buildings down and rebuild [them for a] new purpose - data centers, industrial climate-controlled storage," he said.
Currently, vacancy rates of office spaces in the commercial real estate sector are nearly 1.5 times the amount than at the end of 2019, according to a report by real estate firm Cushman & Wakefield.
Moody's Analytics also called the 19.2% office vacancy rate this quarter "perilously close" to vacancy rates in 1986 and 1991, which were at a record-high 19.3%.
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