Grant Cardone Explains How The $2.7 Trillion Debt Crisis Can Blow Up The Economy: 'The Problem Is So Big It Can Drag Down 300 Banks'

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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Office Space Is Losing Demand

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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Leverage Is A Double-Edged Sword

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.

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Long-Term Headwinds Can Make It Worse

While some locations have more insulation than others, the outlook doesn't suggest a V-shaped recovery for commercial real estate. Cardone mentioned that some commercial real estate properties are selling for 10 cents on the dollar. While that may only apply to a small portion of real estate properties, a Redditor compiled a list of recent San Francisco commercial property sales that are hard to ignore. 

The first example is pretty close to Cardone's claim of commercial properties selling for 10 cents on the dollar. Most of the properties on the list have lost 50% to 80% of their value within a decade.

Vacancy rates may continue to drop as remote and hybrid work become normalized. Apartments may also face some heat due to deportations increasing the housing supply and low fertility rates continuing to fuel the trend of new retirees outnumbering new workers. 

Although long-term headwinds remain, Trump's tariffs can benefit the industry by forcing the Fed to lower interest rates. Near-zero interest rates would make it easier for investors to refinance their commercial real estate loans. This approach would kick the can further down the road, but Cardone's warning about a $2.7 trillion commercial real estate collapse holds a lot of merit.

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