'Shark Tank' investor Kevin O'Leary warns of 'real chaos' in the coming months as high interest rates batter the US economy

• The US economy is in for "real chaos," according to "Shark Tank" investor Kevin O'Leary.
• That's because high interest rates are battering commercial real estate, banking, and small businesses.

"Shark Tank" star Kevin O'Leary thinks high interest rates are about to spark a fresh bout of chaos in the US economy.

The famed investor pointed to high interest rates as the result of the Federal Reserve's battle to bring down inflation. The fed fund rates at a range of 5.25%-5.50% is the highest the rate has been since 2001, which some observers fear could overtighten financial conditions and push the economy into a recession, economists have warned.

High rates could particularly spell trouble for the commercial real estate sector, where there's around $1.5 trillion of debt that's set to mature within the next two to three years. That means loans that were previously financed at a 5%-6% interest rate will face a cost of borrowing around 9%-11%, O'Leary predicted, which is putting pressure on property firms.

Troubled property assets have already hit $64 billion according to a Bloomberg analysis, while commercial mortgage delinquencies rose to 3% in the first quarter of 2023.

Banks are also under pressure as they brace for higher capital requirements, O'Leary said. Many have started to pull back on writing new loans, with lending conditions tightening the most on record this past April, according to Morgan Stanley.

"That is going to cause a real run again on these banks. Because if you have a payroll account at a regional bank right now … you're quietly moving it to Citi or JPMorgan or Morgan Stanley." O'Leary said in an interview on Fox Business on Sunday.

The trouble will ultimately spill over to small businesses. Practically "no one" is lending to businesses with under $500 million in sales, he added, which he believes is causing some companies to turn to the shadow banking market.

"This is causing some real chaos in the very short term," he warned, predicting that lending pressures would reach a boiling point sometime between September and November of this year. "[If] you don't put any capital into the small business sector, which is 60% of the jobs in America, you're going to start to see some real chaos."

O'Leary, who has a portfolio of investments in over 30 small businesses, has repeatedly warned of a funding crisis for small firms as interest rates tread higher, adding that his own companies have been unable to "raise a dime." S&P 500 firms, meanwhile, have benefitted from stimulus measures created by the Biden administration, he said.