The US commercial real estate sector will suffer a painful downturn unless wary banks resume lending to developers, Ross Perot Jr. warned.
“The key to commercial real estate today though will be banking,” the real estate billionaire and son of two-time presidential candidate Ross Perot told Bloomberg on Wednesday. “If the industry can’t get a construction loan, real estate will have a recession.”
Several commentators including Elon Musk and Bill Ackman have sounded the alarm on commercial real estate in recent weeks. The catalyst for their concerns? The Fed hiking interest rates from nearly zero to upwards of 5% since last spring in an effort to curb inflation.
Higher rates encourage saving over spending and raise borrowing costs, which tends to pull down asset prices. That’s because investors can earn solid, guaranteed returns from bonds and savings accounts, which erodes the appeal of riskier assets such as stocks and real estate.
Meanwhile, consumers are facing historic inflation and higher monthly payments for their credit cards, car loans, mortgages, and other debts. If consumer spending falls as a result, a recession may set in, which tends to be bad news for most industries.
Moreover, higher rates contributed to the recent troubles at Silicon Valley Bank, Signature Bank, First Republic, and other lenders. Some banks have now started to make fewer, safer loans in anticipation of further bank runs and tighter regulations, stoking worries of a broader credit crunch.
Between sliding asset values, bigger debt costs, a potential recession, and smaller banks pulling back on lending, the commercial real estate industry — which borrows heavily from regional banks —is facing a raft of headwinds.
Indeed, the battle to secure bank financing has left some real estate firms with no choice but to borrow from Perot Jr. and his companies.
“They would not come to us if they could go to a bank,” the chairman of The Perot Group and Hillwood told Bloomberg. “That is why we will have a real estate recession if the banks do not start lending.”