From artificial intelligence to extraterrestrial life, Tesla Inc. CEO Elon Musk discussed a wide range of topics during his Fox News interview with Tucker Carlson. He also touched on commercial real estate — and the message is pretty dire.
“We really haven’t seen the commercial real estate shoe drop. That’s more like an anvil, not a shoe,” Musk said. “So the stuff we’ve seen thus far actually hasn’t even – it’s only slightly real estate portfolio degradation. But that will become a very serious thing later this year, in my view.”
He pointed out that the work-from-home trend has substantially reduced the use of office buildings around the world. And that does not bode well for commercial real estate.
“Almost all cities at this point have record vacancies of commercial real estate,” Musk explained.
These vacancies could have serious consequences — and even banks could be in trouble.
“Commercial real estate used to be something that was a Grade A asset, that if a bank had commercial real estate holdings those would be considered the highest security … some of the safest assets you could have,” he said.
“Now, that is not the case anymore. One company after another is canceling their leases or not renewing their leases. Or, if they go bankrupt, there’s nothing for the bank who owns that real estate to go after, because they were a previously strong company now dead. What do you go after at that point?”
It’s a dire picture. Bank failures have already been in the headlines. Should they suffer further blows from the anticipated downfall of commercial real estate, the entire system could be at risk.
The Proverbial Ring Of Fire
Musk is not the only one who sees challenges for the segment on the horizon. Real estate industry veteran Benjamin Miller also predicts impending financial turbulence.
Miller is the co-founder and CEO of the real estate crowdfunding platform Fundrise. In the latest investor update, he wrote, “Before the next upswing begins, markets (along with all investors) must first pass through this final stage of financial turmoil, a crucible reforging of markets — akin to the proverbial ring of fire — where nerves will be tested and the ill-prepared left wanting.”
He explained that the U.S. has enjoyed a long period of near-zero interest rates and a record amount of quantitative easing. And now that the Federal Reserve has started tightening, the outlook is bleak for an economy that relies heavily on borrowing.
The upheaval could arrive soon.
“We expect that sometime this summer (or early fall) the continued buildup of pressure in the system will boil over, causing widespread breakages in financial markets (The Great Cascading of The Great Deleveraging) with the debt-ceiling crisis as the likely tipping point,” Miller said.
But this is not doom and gloom. Although Miller expects worry and fear to lead to sell-offs in the markets, he also sees opportunity ahead.
“The good news is that these signals indicate that we are nearing the bottom and portend the arrival of what could potentially become an extremely favorable period for new investments,” he said. “The time to move into aggressive deployment mode is nearing” for investors who can afford it.
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Who would benefit from this expected market turmoil?
Benzinga real estate expert Kevin Vandenboss says if banks are ready to pull back on commercial real estate lending, private lenders like Blackstone Inc. and Apollo Global Management Inc. could see their business flourish.
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“REITs with strong balance sheets would also be worth watching,” he said.
If the market experiences a downturn, real estate funds with capital to deploy would be able to take advantage of the situation by snapping up high-quality assets on the cheap.
The challenge, of course, is identifying high-quality assets. If the remote work trend continues, office buildings may continue to face high vacancy rates.
The good news? Some real estate assets — such as multifamily properties — tend to be more resilient as people always need a place to live. Meanwhile, with elevated housing prices and high mortgage rates, owning a home has become less feasible. And when people can’t afford to buy a home, renting is the only option.
There are real estate investment trusts (REITs) that focus on multifamily properties. There are also crowdfunding platforms that allow retail investors to buy shares of multifamily properties for as little as $1,000.
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Photo: Wikimedia Commons
