Barry Sternlicht says this is one of the best times in years to make commercial real estate loans. He regrets, however, that his firm can’t take full advantage of the opportunity.
Starwood Property Trust, a Greenwich, Connecticut-based real estate investment trust and the self-described largest U.S. commercial mortgage REIT, could be aggressively originating commercial real estate loans now as “banks are on the sidelines,” Sternlicht said during a conference call. Sternlicht is the REIT’s chairman and CEO, as well as the chairman and CEO of the private alternative investment firm, Starwood Capital Group.
Credit spreads mean newly made loans would be highly profitable, too. “We feel we could deploy capital extremely well and at incredible spreads in this market,” Sternlicht said. “We think we can make extraordinary loans today.”
Instead, Starwood is “going to play defense” for the time being and do "virtually nothing" to protect the REIT’s liquidity. Sternlicht blamed the Federal Reserve raising interest rates seven times last year and one time so far this year for creating "incredibly tight conditions.”
The Mortgage Bankers Association said last month there were 54% fewer originations for commercial real estate loans in the fourth quarter compared to the previous quarter. Banks also boosted their reserves for potential loan losses in the final three months of 2022.
Sternlicht said he has pleaded for the Fed to pause rate hikes as the moves could soon lead to “destroying real wages and real jobs across the service economy.”
Fed's `Sledgehammer' Approach
He added that “those of you who have seen me on TV, I’ve been fairly aggressive trying to get the Fed to stop raising rates.” In September, Sternlicht told CNBC that the Fed was "attacking the economy with a sledgehammer, and they don’t need to."
Sternlicht predicts the Fed’s attempt to lower the inflation rate to 2% will fail. “The Wizard of Oz couldn’t do that. I’m not even sure the Lord himself could actually make that happen,” he said during the conference call. “You’re really just going to crush the economy.”
It doesn't have to be this way, Sternlicht said. He recounted a recent Washington, D.C., visit when, during a ride around the city, his car passed a construction site for a new hotel. Sternlicht was told the lender issued a loan for the project at a very attractive rate.
“I would back up the truck, empty the kids’ trust funds and make that loan today,” Sternlicht said.
Sternlicht did not identify the property during the call. Starwood declined to comment for this story.
The opening exists for Starwood partly because federal banking regulators are “telling most of the banks to cut back lending and shrink their balance sheets,” Sternlicht said.
Starwood is also pulling back in certain segments of the property market. It has steadily reduced its exposure to the office sector because many buildings remain partly empty as employees resist giving up remote-work schedules. Office properties, as a percentage of the REIT’s total commercial loan portfolio, fell from 38% at the end of 2019 to 23% at the end of 2022.
“We have almost no [office] exposure to New York or San Francisco … two of the toughest markets,” Sternlicht said.