Dallas-based real estate mogul Ross Perot Jr. has suggested that the U.S. commercial real estate sector is heading toward a possible recession.
The commercial real estate sector benefited from low inflation and low interest rates for decades, but after the global shakeup from the COVID-19 shutdowns in 2020, along with rising interest rates and tightening credit in 2022, Perot Jr. sees a major downturn for the sector and a strong chance of a recession sometime soon.
“It’ll be years before we really understand the damage the pandemic did to the world,” Perot told Fortune. “[The pandemic] broke the habit patterns of millions of people that used to go to work every day in a real office.”
With fewer and fewer people working in an office, demand for “commercial real estate, overall, will slow down,” he said.
While Perot suggested that commercial real estate is heading toward a recession, some experts believe the sector is already in the midst of one, reported Fortune.
“What’s happening in the office sector is apocalyptical,” claims Fred Cordova, founder and CEO of Corion Enterprises, a Santa Monica–based commercial real estate brokerage and consultancy firm, per Fortune.
“We’re creating this huge class of zombie buildings, buildings that no one wants to put any money into because the capital structure is broken,” Cordova said.
Although the commercial real estate market in Dallas may not have been hit as hard as Los Angeles, San Francisco, or Manhattan, Perot argues that the surge in office vacancies nationally will eventually start to impact demand and prices in the Big D.
“It’s not attractive enough because now if you do go to the office, people want new, beautiful, highly amenitized offices, and a lot of [them] don’t have the money to fix up, and I think the conversion of office to residential is really going to be hard,” Perot said, per Fortune.
Since most commercial properties are financed with debt, receiving approval on a commercial loan has become much more difficult, especially considering rising interest rates and stresses in the banking sector.
“It’s difficult to get a real estate loan, and it’s difficult when all these loans come due,” Perot told Fortune. “Do the banks have the money to renew the loan? That’s the big question. Even if you’ve got a good property, these banks might need the money back to solidify their balance sheet.”
These challenging macroeconomic factors have created a nightmare situation for developers and the banks that finance their construction projects, according to Perot.
“I don’t like the bank loans, I don’t like the amount of equity you need to put into a new project now,” he told Fortune. “A lot of developers, like myself, we’re going to go risk-off. We’re going to pause.”
If the majority of commercial developers and banks choose to go “risk-off,” then Perot suggested we are surely headed for a slowdown.
“If the banks are this risk-off, and they’re not making real estate loans, the real estate industry will stop. … If the banks don’t loan, you’ll have a recession,” Perot said.
