In the 1970s, Ross Perot Jr., whos now chairman of the Perot Group and Hillwood, and his father bought and sold land. His father was, of course, Ross Perot, two-time presidential candidate and founder of Electronic Data Systems, and eventually, Perot Systemsdeemed the fastest richest Texan ever, in 1968 by Fortune.
Well into the 1980s after hed been buying and selling land on his own, Perot Jr. founded Hillwood, a Dallas, Texas-based commercial and residential real estate development company. Following the savings and loan crisis, Perot says he became a developer out of necessity.
After four decades of low inflation and low interest rates, the era of cheap money has endedand the tailwinds hes seen throughout his real estate career have turned into headwinds, Perot Jr. says. High interest rates coupled with tightened credit, thats made borrowing more expensive and more difficult, along with the transition to working from home, has Perot suggesting that commercial real estate, overall, will slow down, and potentially head toward a recession.
Itll be years before we really understand the damage the pandemic did to the world, Perot tells Fortune, adding that for one, it broke the habit patterns of millions of people that used to go to work everyday in a real office.
All eyes are on the office sector, and as Fortunes previously covered, some say its already crashing. Fred Cordova, chief executive officer and founder of Santa Monicabased commercial real estate brokerage and consultancy firm Corion Enterprises, recently told Fortune that whats happening in the office sector is apocalyptical: Were creating this huge class of zombie buildings, buildings that no one wants to put any money into because the capital structure is broken.
Perots take isnt much different, but from his own experience, he says that Dallas hasnt been hit nearly as badly as Los Angeles, San Francisco, and Manhattan. In fact, his firm is developing an 800,000 square foot tower for Goldman Sachs thatll serve as the banks Dallas-based office. But New York City is a different story, and he has no idea what theyll do with all the old office buildings.
Its not attractive enough because now if you do go to the office, people want new, beautiful, highly amenitized offices, and a lot of [them] dont have the money to fix up, and I think the conversion of office to residential is really going to be hard, Perot says.
Although Perot does see this as an opportunity for the city and statehe says hed buy some of those old office buildings, tear them down, and turn them into parks. But that wouldnt solve New York Citys housing problems.
Before I could finish asking Perot if his concerns regarding commercial real estate extended beyond office, he said its all commercial real estate and that its difficult to see how were not going to have a real estate slowdown. Commercial real estate is largely built on debt, and with interest rates thatve gone up and stress in the banking sector, its not so easy to get a loan anymore.
Its difficult to get a real estate loan, and its difficult when all these loans come due, Perot says. Do the banks have the money to renew the loan? Thats the big question. Even if youve got a good property, these banks might need the money back to solidify their balance sheet.
Industrial is strong, but it was overbuilt during the pandemic, Perot says. Multifamily has been overbuilt too. Lending has changed, and for the commercial real estate industry that means its headed into a buying phase rather than a building phase, according to Perot.
I dont like the bank loans, I dont like the amount of equity you need to put into a new project now, Perot says. A lot of developers, like myself, were going to go risk-off. Were going to pause.
Still, hes optimistic for his own company, even though he tells me his clients are slowing down and its becoming tougher to get loans, while everything is just sort of on unstable ground. Moving forward, Perot says we should expect a shakeout within the commercial real estate sector, at which point the weaker players will come to the surface. Then, the sector will enter into a restructuring phase, which could look like veteran developers coming in with rescue capital. But before that happens, a wave of commercial real estate loans are set to mature, which as Fortunes previously reported is likely to result in increased delinquencies and defaults amid tightened credit and falling property values.
I mean, youve got to believe its going to happen, Perot says. You hope it doesnt, but you got to prepare for it. And thats why the banks are not lending because the banks dont know what kind of hits theyre going to have on their existing loan portfolio.
So whats next? Well theres some good news. For one, Perot says he doesnt think therell be a prolonged housing downturnand if there is, it wont be anything like 2008. But within the commercial real estate sector, youll have a recession, Perot says, pointing out that because the government is increasingly spending on renewables, the industrial space could offset some pain. However, in his view, it all comes down to the relationship between the banks and the commercial real estate sector.
If the banks are this risk-off, and theyre not making real estate loans, the real estate industry will stopif the banks dont loan, youll have a recession, Perot says.
