Ross Perot Jr., renowned entrepreneur in the Texan commercial real estate scene and current head of both the Perot Group and Hillwood, has voiced his concerns about the possibility of a downturn in the commercial real estate (CRE) sector. He anticipates that the full impact of the pandemic on the world will only become clear over the coming years.
Perot Jr. follows in the footstep of his father, H. Ross Perot
Perot Jr. entered the real estate business alongside his father, Ross Perot, in the 1970s. The elder Perot had a successful career in tech, founding Electronic Data Systems and Perot Systems, and even ran for president twice. He was dubbed by Fortune as “the fastest richest Texan ever” in 1968.
In the following decade, Perot Jr. established Hillwood, a real estate development firm based in Dallas, Texas. He turned to development as a necessity in the wake of the savings and loan crisis.
Now, he observes that the economic conditions which favored the real estate industry—low inflation and interest rates—are changing. With interest rates climbing and credit becoming less accessible, coupled with the shift to remote work, he believes the momentum in the commercial real estate sector could slow down, perhaps to the point of recession.
Work from home changed everything.
Perot Jr. discussed the shift in working habits induced by the pandemic with Fortune, stating that the pandemic “broke the habit patterns of millions of people that used to go to work every day in a real office.”
The office sector is in the spotlight, with some predicting a crash. For instance, Fred Cordova, CEO and founder of Santa Monica–based Corion Enterprises, described the situation in the office sector as apocalyptic, leading to a rise in “zombie buildings” that no one wants to invest in due to a broken capital structure.
Although Perot Jr.’s observations align with Cordova’s, he notes that Dallas has not been as severely affected as Los Angeles, San Francisco, or Manhattan. His firm is currently constructing an 800,000-square-foot tower for Goldman Sachs’ Dallas office. However, he is uncertain about the future of the many vacant office buildings in New York City.
According to Perot Jr., converting office spaces into residential areas will be challenging due to the high costs involved and the preference for modern, well-equipped office spaces. He sees potential in purchasing these buildings, demolishing them, and converting the space into parks, though he acknowledges this won’t resolve the city’s housing issues.
Perot Jr. Sees a Broader Slowdown on the Horizon
When questioned about the broader commercial real estate market, Perot Jr. predicts a general slowdown. The rise in interest rates and banking stressors have made obtaining loans more difficult. This is particularly problematic as commercial real estate is largely debt-driven.
Perot Jr. admits that while the industrial sector remains strong, it was overbuilt during the pandemic. Multifamily properties were overbuilt as well. With changes in lending practices, the commercial real estate sector may shift from construction to purchasing.
Expressing concern about the current loan conditions, Perot Jr. stated, “A lot of developers, like myself, we’re going to go risk-off. We’re going to pause.”
Perot is Positive About the Future
Despite the challenges, Perot Jr. remains positive about his company’s future. He foresees a reshuffling in the commercial real estate sector where the less stable companies will emerge, leading to a restructuring phase. Veteran developers could step in with rescue capital at that point.
Perot Jr. believes that a wave of commercial real estate loans will mature soon, potentially leading to more loan defaults and delinquencies amid tighter credit and falling property values. He urged for preparedness, saying, “You hope it doesn’t, but you got to prepare for it.”
Moving forward, he doesn’t foresee a prolonged housing downturn similar to that of 2008. However, he predicts a recession within the commercial real estate sector, suggesting that government investments in renewable industries could alleviate some of the pain in the industrial space. Ultimately, he believes the future of the sector will depend on the relationship between the banks and the commercial real estate industry.
