Saturday, July 22, 2023

Real Estate—Starwood Capital's Barry Sternlicht On CRE: Some will become parkland, ‘Maybe fields of grain or something. It’ll be very pretty’

From Fortune July21:

Billionaire Barry Sternlicht on the ‘category 5 hurricane’ hitting office buildings: Some will become parkland, ‘Maybe fields of grain or something. It’ll be very pretty’

Surging interest rates and the rise of remote work have combined to create a nightmare scenario for commercial real estate investors. Just ask Barry Sternlicht, co-founder, chairman, and CEO of Starwood Capital Group, a real estate investment firm with $115 billion in assets under management.

“There’s a hurricane over real estate right now,” the billionaire investor told ​​David Rubenstein, co-founder of the private equity firm The Carlyle Group, in an interview for Bloomberg Wealth taped June 28. “We’re in a category 5 hurricane, and it’s sort of a black cloud hovering over the entire industry until we get some relief or some understanding of what the Fed is going to do over the long term.”

Sternlicht, known for criticizing the Federal Reserve’s aggressive interest rate hikes over the past year, said he believes his industry is a victim of central banks’ efforts to tame inflation. He had some thoughts about how much damage the hurricane could do, and it’s not clear if he was joking.

Rising rates, the prospect of an economic downturn, and the historic collapses of several regional banks March have combined to make financing commercial real estate transactions either extremely expensive or nearly impossible, according to the industry veteran, who gave the example of Starwood reaching out to 33 banks for a loan on a small property and getting only two offers.

Starwood is one of the world’s biggest players in residential and commercial real estate, and over the past year it’s been under pressure, facing redemption requests from investors in some non-public funds and even defaulting on a $212.5 million mortgage for an Atlanta office tower earlier this month.

Sternlicht warned that his firm isn’t alone when it comes to these issues, noting that office real estate owners, in particular, are suffering amid high vacancy rates. Two of Starwood’s biggest corporate landlord peers, Blackstone and Brookfield Asset Management, have stopped making payments on some offices with high vacancy rates amid the work-from-home trend, Bloomberg reported.

Sternlicht argued this is evidence the office sector will be split into haves and have-nots in the coming years—and many have-nots may go out of business.

“The nice buildings will stay rented and my guess is at pretty good rates. And the B and C stuff is going to be — maybe fields of grain or something. It’ll be very pretty. We’ll have all these little mid-block parks in New York City because there won’t be anything else to do with those buildings,” he said.

It’s not just Sternlicht who is worried about commercial real estate and the future of offices....