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April 10, 2023

Washington's Blindspot: The Real Estate Threat

Washington's Blindspot: The Real Estate Threat

In TLP’s sixth solocast, we are with our very ownThe Limited Partner PodcastHost,Jake Wiley.He is a podcaster, author, entrepreneur, CPA, former CFO, and head core client relationships for Private Equity Real Estate and Alternative Investments. Today’s podcast episode is focused on the commercial real estate threat that Washington potentially does not know about and how it could affect the whole financial system (banks).

The Real Estate Threat!

The US commercial real estate market, which is worth around $20 trillion, could face a potential risk of a crash over the next two years due to the pandemic's impact on the office leasing and construction markets. With many companies shifting to remote work and reducing office space, the market has been left with a high number of vacancies, leading to fears that many leases may not be renewed, thus driving down the value of commercial real estate across the board. While some business owners are pushing to get people back into the office, many occupiers are opting for a reduced footprint, leading to a potential slow-moving train wreck.

Return to Office = Employee Resentment
Jake Wiley discussed in a podcast the potential impact of office culture and employee resentment on office valuations. While companies are pushing for their employees to return to the office, forcing them to do so could lead to resentment, reduced productivity, and ultimately high turnover rates. The commute time plays a significant role in the employees' decision to return to the office, and once it exceeds 15 to 20 minutes, the number of employees coming back declines. As a result, office valuations may be affected as many companies opt for a reduced office footprint, which could impact the commercial real estate market.


The Problem with Office Spaces and Banks 

Jake discussed how the commercial real estate market could lead to a potential banking crisis in the near future. The loans banks have made against office buildings based on leases and revenues in place may become worth much less, potentially causing runs on banks and a decline in the value of commercial real estate by up to 30%. Small regional banks are particularly at risk. While some banks are diversifying their portfolios to protect against the downturn, the Fed and Washington may not be fully considering the fragility of the banking system and the potential impact on commercial real estate.

Opportunities in Calamities?

Jake Wiley discusses the potential risk of a commercial real estate market crash and the impact it could have on the banking industry, particularly regional banks. He explains that the loans made by banks based on the leases and revenues of office buildings could be worth much less due to the declining demand for office space. This could result in a run on the banks similar to what was seen with SVB, leading to bank failures. While there are opportunities to acquire property at lower valuations, Wiley urges proactive measures to engineer a softer landing. He suggests calling senators to express concerns about the potential risks to the banking system.

Who is Jake Wiley?

Jake is a podcaster, author, entrepreneur, CPA, former CFO, and head core client relationships for Private Equity Real Estate and Alternative Investments. 

With nearly two decades of professional experience building businesses, solving problems, and implementing solutions, Jake has the ability to serve his clients from the perspective of having sat in their seats.

He founded a Louisiana-based Residential Solar Finance and Installation Company, which was later acquired by Palmetto where he led strategic initiatives until late 2018 and then moved on to be a Chief Financial Officer and Chief Compliance Officer at an RIA fund focused on commercial solar. 

He has been investing both passively and actively in Real Estate for more than 16 years, raising private funds for strategic value-add investments and long-term holds. This is a true passion of his, so much so that he has a Podcast, The Limited Partner Podcast, where he gets to interview and talk to some of the best of the best in the space to learn how they are making it happen. 

His diverse industry experience in both corporate and startup companies, as well as layered work experience as an executive, founder, and advisor, allow for unique, well-rounded, and informed perspectives that he is always happy to talk about.