The Blubber

Kevin O’Leary says a coming real estate collapse will lead to ‘chaos’ and banks "are going to fail because up to 40% of their portfolio is in commercial real estate," per BI.

“Many of these office spaces are in sub-grade markets, but even in cities like Boston, you find lots of vacancies — up to 40% of buildings,” O’Leary 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.”

What’s unique, that’s just coming onto the radar screen, [is that] most of these cannot be used again as office [space] because the economy has changed,” he said. “No one saw this coming. But up to 40% of people that work in small businesses don’t return to offices anymore. So we have to repurpose this.”

“You can’t do that without zoning changes and policy [changes],” he said. “It’s very difficult. 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. That’s where we have to do it, but who’s going to pay for it? That’s what the question is because we’re talking about a trillion dollars in aggregate here. So there’s big problems and it’s going to manifest itself in these regional [banks] over the next 36 months.”

“Most of these buildings were built over the last 30 years and [have mortgages with] interest rates of less than 4%,” he said. “Now the Fed has raised rates to 5.5% terminal rate, which means these mortgages are going to be refinanced at 9% to 11% — so a 3x cost. So many of these buildings won’t be economically viable.”