Starwood Capital Chairman and CEO Barry Sternlicht (right) on stage with Citi analyst Michael Bilerman (left) at NYU's REIT Symposium.
The prognosis for commercial real estate at the end of the first quarter is good if not great, thanks in large part to the Federal Reserve's dovish tone around interest rates.
Barry Sternlicht, chairman and CEO of Starwood Capital Group, called interest rate policy "probably the biggest home run of the year" for real estate players, and the main driver of real estate investment trusts' robust run so far in 2019. A "fairly balanced" lending environment has added to industry tailwinds.
"The banks have not done any of the things you might have expected they'd do late in the cycle," he said.
Sternlicht, speaking April 3 at NYU's annual REIT Symposium in New York, predicted rates will decline through the end of the year and into 2020, "because [President] Trump will stomp on [Federal Reserve Chairman] Jerome Powell's head if the economy weakens and he doesn't lower rates."
He also predicted the U.S. will see an economic slowdown in 2020 — rather than negative growth or a recession — projecting about 1% growth in gross domestic product, which will dampen construction lending.
"It's nirvana for real estate," he said. "This is great for us. It doesn't induce tons of new supply. The markets are feeling up across most asset classes."
Sternlicht said he still favors the multifamily segment, and he prefers European markets to the U.S., particularly Berlin, given its wider spreads between capitalization rates and debt rates, as well as the difficulty of building new product there. Starwood owns about 80,000 apartments globally.
"I'm surprised, frankly, that this late in the cycle we've found so many things to do," he said.
Sternlicht pointed to high-end residential in New York City as among the "pockets of catastrophes coming" to the commercial market as a result of oversupply, alongside segments of the lodging market. The degree to which tech tenants have commandeered the office market also poses significant risks. Tech stocks comprise about 25% of the S&P 500, and only 10 or so names account for about 40% of recent office absorption nationally, he estimated.
"They are the office market. It's not the banks. It's not the service companies. It's these tech companies. ... They are driving office demand. If they hiccup in the public markets, not only will the S&P go down, but the real estate markets will go down," he said.
In Asia, Starwood is looking at a "fairly large play" in Japan — a "public company situation" that could wind up being a hostile maneuver.
"It's a market we've never lost money in, but we haven't been in in more than a decade," he said. "If it would be hostile, we're not going to fight a single person. We just want to change their [capital] stack. They don't look like a real estate company, but they are."