The Shift to Remote Work is Hurting Sectors Beyond Real Estate, According to Kevin O’Leary
The rapid shift to remote work has transformed office space from a necessity to a liability, causing concerns about the collapse of commercial real estate values nationwide. Entrepreneur Kevin O’Leary recently expressed his concerns about the situation, stating that it will have a significant impact on the regional banking sector. O’Leary believes that certain banks are at risk of failing because up to 40% of their portfolios are invested in commercial real estate.
O’Leary’s concerns are shared by others in the business community, including Warren Buffett and Charlie Munger. In April, Buffett warned that some banks could face heavy losses on their commercial real estate paper, while Munger has also expressed concerns. Economist Mohamed El-Erian also issued a warning about emerging issues in the sector in September.
The main factors contributing to these concerns are rising interest rates and a decline in demand for office spaces. O’Leary pointed out during an interview with Fox Business that what makes this situation unique is that most of these office units cannot be repurposed due to changes in the economy. He stated that up to 40% of people who work in small businesses no longer return to offices, a trend that has persisted long after the pandemic.
O’Leary’s own portfolio includes several small and mid-sized businesses that bank with the regional firms he is worried about. This gives him a unique perspective on the emerging issue. He believes that remote work becoming a permanent arrangement has made many previously valuable units of commercial real estate unnecessary.
According to global real estate services company JLL, the overall vacancy rate of office space in the US was 21% at the end of Q3 2023. Additionally, a report by real estate services firm Cushman & Wakefield estimates that there could be at least a billion square feet of empty office space across the United States by 2030, representing a 55% surge from pre-pandemic levels.
While demand for office space is declining, costs are rising. Interest rates have significantly increased in recent years, putting additional pressure on an already vulnerable market. O’Leary believes that this situation will trigger a correction in the commercial real estate sector. Many office buildings across the country will not be economically viable at the current substantially higher interest rates.
This doom loop has already begun, with regional banks restricting lending to small businesses due to their exposure to commercial real estate. This capital squeeze could leave businesses without operating capital, leading to further cuts to the workforce and office requirements. This, in turn, would increase pressure on commercial real estate.
Overall, O’Leary sees a grim outlook for the regional banking sector, the commercial real estate market, and small businesses. The combination of rising interest rates and the shift to remote work has created a challenging environment that could lead to bank failures and a collapse in commercial real estate values.
