It’s no wonder CEOs feel a little relieved about what 2023 has in store. While the long-predicted recession has not materialized (at least not yet), the “new normal” of hybrid work with remote employees is taking hold. I return to the office regularly, primarily Tuesday through Thursday. And while the historic failure of a Silicon Valley bank in early March initially rippled through the Bay Area, Washington, D.C., and Wall Street, it did not create the kind of contagion that would cause a financial crisis. But Kevin O’Leary shark tank The star and chairman of O’Leary Ventures sees a different situation: a bad one.
As a watcher of the hit ABC series (and its Canadian predecessor), dragon’s den) I know very well.Mr. Wonderful” He has successfully invested in hundreds of small and medium-sized businesses, so he knows from firsthand what local banks don’t advertise much about: they stop making loans. He spoke about capital call requirements arising from commercial real estate woes. fox business Sept. 15 host Larry Kudrow is “causing chaos.” At the same time, he also noted that the Internal Revenue Service has immediately stopped claiming the Employee Retention Credit to small businesses. O’Leary said that to his knowledge, it was the only active program that allowed businesses to get capital directly from the government, but it has now been shut down. The IRS says the pandemic-era relief program, which was suspended amid growing concerns about fraudulent claims, is one of many similar programs that have ended. For parents, the termination of subsidies for childcare facilities has come to be known as the “childcare cliff.”
“Over 800 of my companies applied for this,” O’Leary told Kudlow, adding that they were invaluable. “More than half of them received the funds, which in some cases saved the company,” he added.In a subsequent interview he concluded that “These programs are not working together, they are not in sync. There is pressure on local banks [a] Commercial real estate is collapsing and small businesses can’t get funding. This is all bad news. ”
What about future “fixes”?
O’Leary said the predicament appeared on his radar about nine months ago during a conversation with Kudlow, a former head of the National Economic Council under former President Donald Trump. This is because many of the companies in his portfolio are small and medium-sized enterprises that utilize local resources. Bank. Mr O’Leary said a “fix” was the only conclusion. However, it is unclear what form that will take.
With remote work hollowing out many downtowns across the country, “we’re going to have to refinance these buildings, and a lot of them don’t have any capital left,” O’Leary said. “These banks will fail because up to 40% of their portfolios (we’re talking local banks) are invested in commercial real estate.”
According to Colliers, the domestic office vacancy rate reached 16.4% in the second quarter of this year, slightly higher than the previous peak seen at the height of the global financial crisis. Some markets, such as Los Angeles, Manhattan, and San Francisco, have much higher vacancy rates. And due to economic changes, some vacant office buildings can no longer be used as offices, O’Leary said. Mr O’Leary said there was a need to repurpose offices, especially small businesses, as many employees were no longer going to the office.
The question, O’Leary estimated, is who will pay for it, especially if it could reach up to $1 trillion. All he can conclude is that big challenges, and perhaps even bigger problems, lie ahead, and they’ll be felt across local banks over the next three years.
O’Leary went on to add that most of these buildings have five- to seven-year mortgages with interest rates below 4%, or worse, variable rate mortgages. Buildings that need to be refinanced will be refinanced at higher interest rates, say 9% to 11%, as the Federal Reserve has raised interest rates several times over the past year in an effort to curb inflation, which will reduce costs. will rise, O’Leary said. Some of those buildings are no longer economically viable.
O’Leary’s comments have resonated widely among financial commentators. For example, on Friday, Ed Yardeni, a Wall Street legend and founder of Yardeni Research, aired a similar song. bloomberg tv: “Something is breaking right now, and that’s the commercial real estate market. There’s going to be a lot of changes in the commercial real estate market, and I think that’s one of the reasons the Fed is probably going to finish raising rates.”
With bond yields rising to nearly 5%, Yardeni said, “It’s a dire situation for a lot of commercial real estate deals that need to be refinanced, or for the value of commercial real estate.” He said this is reminiscent of the early 1990s, when “a lot happened in the commercial real estate market” after the savings and loan crisis, and many compared the event to the failure of Silicon Valley banks. .
Mr O’Leary sees a long and difficult road ahead. “We need to take old offices and turn them into air-conditioned warehouses or apartments,” O’Leary said. “But in a city like New York where the streets are being destroyed, Double B buildings are just sitting empty, and you can’t do that without rezoning. And the policies there are very It’s difficult, so in the long run… it might be better to actually demolish these buildings and rebuild them.”
