Did you know that $2.7 trillion in commercial debt is maturing in the next 30 months? This event can have significant ramifications on the global economy, and Grant Cardone doesn’t mince words when he says what can happen.
“The problem is so big, it can drag down 300 banks,” the real estate investor and author of “The 10X Rule” stated.
Is the claim overblown hyperbole, or is it justified for investors to be worried about the looming debt? These are some of the details to consider.
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While Cardone also mentioned apartment buildings, he put most of the focus on office space when describing the looming $2.7 trillion debt. Commercial real estate isn’t doing as well because people got comfortable with remote work during the pandemic. Many companies now offer hybrid work or fully remote work, and that reduces the demand for office space.
Fewer tenants and less demand translate into lower rents and vacant units. That’s not good for landlords, and it can lead to loan defaults. An asset class that is losing value will only get worse if foreclosures become more common. Cardone mentions that regional banks can feel the most pressure since commercial real estate makes up a large portion of their books.
He believes that more than 300 banks can go out of business. Cardone also mentioned that government pension funds can also go bust once commercial real estate prices crash.
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The looming commercial real estate crisis highlights the risk of leverage. While you can generate passive cash flow and have your tenants cover your mortgage, conditions can change quickly and leave investors in vulnerable positions.
Lately, Cardone has been using cash to finance his deals. He’s said that he’s waiting for interest rates to get lower before borrowing against his properties. While buying a rental property with 3% down may sound attractive to a real estate investor who wants to quickly scale their portfolio, there are significant risks with this approach.
Over-leverage combined with a declining demand for commercial real estate can put a lot of pressure on financial institutions. Office space in big cities like Boston and San Francisco is also facing downward pressure that can affect how those cities generate tax revenue.
