Barry Sternlicht: ‘Category 5 Hurricane' Has Come For Commercial Real Estate

New distress opportunities are emerging for commercial real estate players able to weather the current storm, but buyers may need to be able to endure the current fiscal difficulties for longer than some expect, billionaire commercial real estate executive Barry Sternlicht said.

“We’re in a Category 5 hurricane,” the Starwood Capital Group founder and chairman said in an interview on Bloomberg this week. “It’s sort of a black cloud hovering over the entire industry until we get some relief or some understanding of what the Fed’s going to do over the longer term.”

The U.S.’ troubled office market, along with high interest rates and a more cautious lending environment, is impacting property values. More than $40B of CMBS office debt alone is due to mature by the end of next year, squeezing commercial real estate and threatening to spread into other asset classes including multifamily, industrial and retail. 

“We really were an accidental consequence of the Fed’s actions,” Sternlicht said  in an interview with Bloomberg. “There's no question that the Fed has reacted dramatically to try to slow the economy down — quite late, obviously — and that has impacted real estate values.”

Starwood has already felt some of the impact. This month, the REIT defaulted on a $212.5M loan for an Atlanta office property that it refinanced in 2018, with occupancy falling from 87% to 62% between the time that the loan was issued and the end of 2022.

Workouts are already happening for the office market, Sternlicht said. But ultimately, Class-B and C assets, especially in places like New York City, may end up being demolished over the long term because of their dramatic loss in value.

“Banks don’t want the assets back,” he said, referring to troubled office properties where owners are tempted to give back the keys. “They’re not set up to carry these assets. It’s not their business.”

Still, if uncontained, the current crisis could spiral into circumstances similar to those that spurred the federal government to create the Resolution Trust Corp. after the Savings and Loan Crisis, Sternlicht said. As many as 500 banks could fail and may have to sell, he predicted.

The RTC was a temporary government entity responsible for liquidating assets of failed savings and loans associations between 1989 and 1995, with Sternlicht’s Starwood firm emerging from the ashes of the crisis to build its portfolio.

Signature Bank’s recent failure is an example of the types of opportunities that could await investors. The Federal Deposit Insurance Corp. is now selling off CRE loans held by the bank, Sternlicht said, predicting that the government is “going to prop up the value of that portfolio by providing very cheap financing to it.”

Investor opportunities will continue to exist in residential real estate in particular, Sternlicht said.

“Now you’re having an ever-increasing scarcity of residential,” he said. “Given the cost of construction, the whole residential complex — including single-families for rent, multifamily, the housing market, even residential land — I think they make interesting investment opportunities today.”