Forget Offices, Kevin O'Leary Says This Is The Next Hot Area For Real Estate

Noted investor, venture capitalist, and television star Kevin O'Leary is never shy about giving his opinions. Although Barbara Corcoran is known as the real estate expert on "Shark Tank," O'Leary is also a very shrewd market watcher, and he hasn't liked what he's been seeing. There is one area that he is excited about, and it's one that a lot of others are paying attention to as well.

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Concerns Over The Doom Loop

In March, O'Leary went on Fox News saying that commercial real estate is on the brink of collapse. While much of the problem is in smaller cities, he noted that even large cities with previously high demand for office space, like Boston, MA, are struggling to fill spaces. Return to work has been slow in big cities despite an increase in return-to-office policies. Occupancy levels remain low, and as longer leases expire, more companies opt to either shrink their spaces or abandon them altogether.

What worries O'Leary is that many small and regional banks with a lot of real estate debt on their balance sheets may be in serious trouble. With more than $2.2 trillion in debt coming due before 2028, much of it financed at lower interest rates, some property owners may find refinancing a challenge. A report from investment advisory firm Klaros Group earlier this year said that nearly 300 small banks were at risk of collapse due to the significant amount of commercial real estate loans in their portfolios. 

O'Leary has also questioned whether or not larger buildings in New York City and other major metropolitan areas can be converted into residential usage. O'Leary told Larry Kudlow of Fox Business that one option is to tear these buildings down because it's hard to turn them into anything other than office space. 

Ongoing Weakness Will Prompt A Change

It's been four months since that interview, and O'Leary recently posted on LinkedIn that he is still waiting for the other shoe to drop in markets that were traditionally headquarters for companies. He cited Texas, California, New York, and Florida as areas where this is occurring. He mentioned a difference between Class AAA properties, the top-tier towers in these markets, and the lower-grade buildings. "If you're a B or BB grade building, you really can't get anybody to rent that space," said O'Leary. 

If these buildings can't be rented to office tenants, other solutions exist. O'Leary called for a redeployment of the spaces, perhaps to temperature-controlled storage or something else, because of the difficulty of converting the buildings into condos. He pointed out that while the plumbing stacks and elevator shafts don't make these buildings suitable for apartments, they may be very useful as vertical warehouses where workers select and pack goods for shipment.

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The New Opportunity

But what O'Leary is most excited about may be good news for the owners of REITs like Digital Realty Trust DLR, Equinix EQIX, and Iron Mountain IRM. O'Leary is bullish on the growth potential of data centers used for AI. Most buildings can't be converted into data centers. They have to be built and require permits, fiber, and, of course, plenty of power. O'Leary stated he currently has projects in Oklahoma, West Virginia, and North Dakota.

O'Leary is far from alone in embracing this trend. On its most recent earnings call, Prologis PLD, the world's biggest REIT, confirmed that it is now aggressively moving into the data center space. On the earnings call, Timothy Arndt, Chief Financial Officer, said that the company has secured 1.3 gigawatts of power and plans to invest $7 to $8 billion in data centers over the next five years. CEO Hamid Moghadam weighed in on the data center business opportunity, noting that Prologis's focus on renewable energy and existing relationships with utilities is a substantial advantage for the company, calling it "something that oftentimes is missing in a lot of data center companies that have just got the real estate component." 

Whether you are able to invest privately in projects like Kevin O'Leary or by taking a share in a data center REIT, like the ones mentioned above, this trend is one to pay attention to. Nothing is certain, and the current AI boom could trickle out, but with billions of dollars headed into the AI space and the increasing demand for generative AI chips, Mr. Wonderful may be right about this one. 

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Don't miss out on this opportunity to take advantage of high-yield investments while rates are high. Check out Benzinga's favorite high-yield offerings. 

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