Bloomberg Wealth: Barry Sternlicht

Unless you have to sell something today. Nobody wants to sell anything today. They think tomorrow will be rosier. It's the most unaffordable the single family home business has ever been. I think in the history of the country. I like to say it is a hurricane over real estate right now. We're in the 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 longer term. For billionaire real estate investor Barry Stern like the original plan was to be a lawyer. I did apply to law school because my mom wanted me to be a lawyer. My brother was a doctor. And then I got in and I said I wasn't going to go. She cried. Instead he got an MBA from Harvard and headed west to J.M.B. Realty in Chicago. Stern like was laid off during the real estate recession of the late 1980s. So he struck out on his own and started buying up apartment buildings and debt from the Resolution Trust Corporation a federal agency formed to clean up the wreckage and the savings and loan crisis. But Sterling is best known for building the hospitality giant Starwood Hotels and Resorts which counted name brand chains like Westin St. Regis and Sheridan among its portfolio. I was 38 and now had a company of one hundred twenty thousand employees in 80 countries and nine billion dollars of debt. So I'm like what on earth did I just do. He famously invented the W which offered luxurious hip accommodations to the masses. I thought we could do a branded boutique which nobody thought you could do. The first one was here in New York. Analysts from Credential Securities I'll never forget this. We're walking through the lobby. What do you do when W doesn't work. And W work. It was it was cool but not ultra cool. It was comfortable though. Starwood merged with Marriott in 2016 to create the world's largest hotel chain. And Sterling is back to running the Starwood Capital Group and it's one hundred and fifteen billion dollars under management. It's not always an easy feat these days as office buildings sit vacant and the Federal Reserve is running up interest rates at the fastest pace in 40 years. A move Sterling has criticized. They went straight vertical on rates. This had happened before. We saw rates go up three four hundred basis points but it was more gradual. This was a direct. We've got to stop this. Now you've been critical. I think it's fair to say of the Federal Reserve. You feel that they raised interest rates too much too quickly. What should they have done in response to Covid when Covid came along. I would say that I I'm empathetic to the situation of Jerome Powell because you have a government that's spending money hand over fist and then you have the Fed trying to break an economy. And I'm critical of Powell because as you may know they use a portion of the data that is quite lagging and they didn't see inflation when it was here. And then when they showed up they showed up late and big. They went straight vertical on rates. We had to increase rates. We should have done them much earlier. We shouldn't have negative interest rates. You shouldn't been buying mortgages into May of 22. That should have stopped so much earlier. We didn't need him to do that. But when he finally stopped he went the other direction and he went so far so fast. And I'm saying just wait. Your view is because of the kind of things you see coming. We will go into a recession in the United States in your view. Yeah. And any way to avoid it at this point or not really. It's interesting. One of my friends had a meeting with one of the governors. Recently last week and they're like we hear all this noise about the real estate but we don't see the issues that they're going to come. And there is going to be a serious credit contraction. The country in any asset class has not adjusted to that cost of capital yet. But it's coming. The economy will slow. You can see the numbers CEO confidence is down. Consumer confidence is down. Retail sales are down. Service economy is wickedly strong. It feels like the last gasp before the. We actually settle into what should be what you'd expect to be. I hope it's a shallow recession. I hope you can pull that off. Normally when you increase interest rates you decrease GDP growth and you increase unemployment. Your point is unemployment is not going up because the statistics aren't really covering the people who are really being laid off. Unemployment isn't going up because structurally interest rates aren't affecting the labor market the way they would normally affect the labor market. You have the offset in construction from the infrastructure bill and you have the service sector which is still recovering pandemic which normally would be tilting over. Let's go back to your beginning. So where were you born. Somewhere on Long Island I think. Okay. And where did you go to high school in Long Island. No I moved to Connecticut when I was five or six with my parents and went to a public high school West Hill High School. And you did reasonably well. You went to Ivy League school you went to Brown. Correct. And you were a superstar there. You were an athlete or you're a great student. Brown was a liberal arts college in Brown. I credit teaching you how to think. I think I'm a generalist thinker. I think a lot of my job is has evolved into being sort of thinking about trends and macro situations and trying to direct our investment strategy. You went to Harvard Business School. So what did you do that attracted Harvard Business School to you. Well I got a job when you don't know how to do anything. You become a consultant. So I got my first job out of Brown was Alan. I worked there for a year. I had some assignments and none of my roommate was working at arbitrage firm on Wall Street. And he was like do you want to come here. And I guess I want to go learn to trade. So I traded the breakup of AT&T. I made a lot of money. They told me I get 10 percent of the profits I made for the firm. I could calculate how much money that was. That was a lot of money back in those days a couple hundred thousand bucks. I think they paid me 50. And I said I don't want to do this is not a fair. So I applied to two business schools. I got in. I never thought I'd get in. I didn't take a math course in college. And so I couldn't get a job on Wall Street coming out of HBS because I had no experience being on the street. And they I wound up getting an offer from Goldman Sachs in the real estate group. But I also got this phone call. I went to visit this firm I never heard of called J.M.D. in Chicago. I was intrigued and it seemed like a fun city. And I thought I'd try something new. So I went to Chicago. So you were downsized by J.M.D.. So did you call your mother and say I should have gone to law school or what happened. No my I was friendly downsized. My my boss Neil Bloom said he'd invest in me and my new company whatever it was. I wasn't sure I wanted to do real estate. But I it was a time of the four other SNL crisis. And I decided I'd met some people over the last couple of years at that time that said they'd back me. I recruited a friend from business school who worked at the Trammell Crowe companies to be my partner because I was the acquisition guy. He'd be the operations guy. And we went out bought 8000 units apartment units because the only thing we could buy were apartments because we have a lot of money. And we were very successful. We in 18 months we decided we'd sell the assets and we sold them to Sam Zell and tripled our money. So the company you started eventually became Starwood. Starwood is in many different businesses. You're in the lodging business. You're in the lending business. You're in the investment in office building and residential business. Right. So you do these two different vehicles. So let's go through the lodging part first. Before you got too well known in the real estate world you did make a very well known real estate acquisition in hotels and lodging when you weren't that well known you bought Weston. Actually maybe you were well known. No. After we sold those apartments to Sam we said what else should we buy. And because prices had run pretty far for apartments and we went to see a group called Westinghouse was having you're going out of business sale. And I said do you have any apartments. They said no. Do you have any lands. We started buying land. No. Do you have any hotels. This is a portfolio we have. It's under contract to a group in Boston but it hasn't closed yet. So I convinced him that we would be more fun. So I took control of the company by buying the debt and then fold in a whole bunch of our assets into that company. And that became Starwood Hotels. We changed the name first to Starwood Lodging and it had eight million dollars market cap in three years. I think it was five billion. That company bought Weston Hotels in 95 which we actually bought privately with Goldman Sachs and we took it publicly bought it into Starwood Hotels. Now we were seven billion in our company and in 1998 I made a bid for ITT Sheridan which is a 14 billion dollar company. When I was 38 I now had a company of one hundred twenty thousand employees in 80 countries and nine billion dollars of debt. So I'm like what on earth did I just do. You built one of the largest hotel and lodging companies in the world the biggest in the world based on cash flow. But you ultimately sold it. I left. I kind of done everything I wanted to do. I'd launched and started W Hotels. I turned St. Regis into a brand and I kind of wanted to go back to the private world. I was tired of being a public company CEO. So I left and went back to start a capital group. And then that business took off. So do you come up with the ideas for these new hotel concepts. You have experts to help you. OK. I do that. So what was the idea behind Baccarat. I'm familiar with. So it's a luxury kind of brand and brand recognition. And W was more hip. Yeah. At the time I was friends with Ian Schrager and he'd done these hotels but like the laundry on the Delano. But there were one offs. And I thought we could do a branded boutique which nobody thought you could do. The first one was here in New York. It opened in 1998. I think it was. And it's a W on Lex behind the Waldorf and the analysts from Prudential Securities. I'll never forget this. We're walking through the lobby because what do you do when W doesn't work. And W worked. It was it was cool but not ultra cool. It was comfortable though it was supposed to be comfortable in those. And I outsourced restaurants to real restaurant tours offending the entire hotel industry. What's the appeal to you of the lodging industry. You're like the creativity of creating the brands or what is it. And is the industry in good shape now. People coming back and going to hotels again because travels back. Well it's a place where I can express my own creativity. I entered real estate for that because I wanted to. I wanted to. You know it's a physical expression I built. We built the back right here in New York. So it's fun to see your your vision come to life. Everyone says you know survive till 25. Hold on to your assets. So so transaction volumes have plummeted. Nobody's trying it unless you have to sell something today. Nobody wants to sell anything today. They think tomorrow will be rosier. The market for office real estate remains in a state of disrepair. The popularity of hybrid work combined with a recent wave of layoffs has sent demand for office space plunging and vacancy rates are on the rise. In the first quarter of 2023 twelve point nine percent of office space in the U.S. sat vacant. According to data from CoStar Group that's an all time high. McKinsey estimates that the shift to work from home could wipe out 800 billion dollars from the value of global office buildings in major cities by 2030. And for investors in these office towers the old playbook isn't working. Those deals were largely fueled by easy access to cheap debt and skyrocketing interest rates makes it harder and more expensive to refinance. Now those loans are coming due. Roughly one point four trillion dollars worth between 2023 and 2024. According to the Mortgage Bankers Association there are signs of promise amid the grim outlook though. According to real estate firm Jones Lang LaSalle office leasing rebounded 7.7 percent from the first to second quarter this year. However those gains are still well below the pre pandemic average. So let's talk about your other business which is the non lodging business. So you are one of the best known and one of the best real estate investors in our country. Right now many people think the real estate market is going to be in trouble because high interest rates are making it more and more difficult for people to service their loans and we're going to have a lot of defaults soon. What do you think about that observation. Anything with a fixed income stream is worth less when rates rise. And the underlying fundamentals and most of the asset classes in real estate are OK right now. The United States apartment market industrial logistics market the hotel markets those are all in good shape. But 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 yields on properties are moving up to reflect this higher interest rate. And the supply of credit to the industry is curtailed dramatically. So it's I like to say it is a hurricane over real estate right now. We're in the 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 longer term. COVID had the effect of letting people work at home. So now people that are saying come back to work come into your offices. And a lot of employees are saying I'd rather work at home. So people are begging them to come in two days three days a week. So is this going to mean in the end that we're going to change the way office buildings are really valued in the future because they're not going to need as much space for their employees for their tenants. Do you think that's true. What do you think eventually the tenants will come back and the employees will come back. First of all the work from home phenomenon is a U.S. phenomenon. If you go to England or Germany and I was just we have some investments offshore and I was just looking at it. Rents are up and vacancy rates in the top European German property markets Berlin Frankfurt Munich Hamburg are less than 5 percent. People are back in the office. You and I go to the Middle East. They're full. We have offices in Asia. They're full. So this is a U.S. situation in the U.S. You have two markets. You have the really nice buildings that are ESG compliant that are lovely like the one we're sitting in this place is buzzing. And they're back because it's a fun place to be. And if you're in a building with lots of cubicles and it's dark and there's no life and love so nice buildings even in a city as as currently destitute as San Francisco from an office market perspective the best buildings are still least. And so you're going to see a bifurcation of the market in office. The nice buildings will stay rented. And my guess is at pretty good rates and the BNC stuff is going to be maybe fields of green or something 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 and nobody will carry them because there's no hope. Some of the cities that have issues on commuting like New York or L.A. downtown L.A. downtown San Francisco the CBD that are difficult to commute to. That's where the pressure is so hard from workers saying I don't want to drive into the city an hour and a half and drive home an hour and a half every day. But I also think a nice little recession will clear this and you'll see people come back to the office. And I was in your town. Take the Amazon HQ too. They're expecting people in those offices four days a week come the fall. So the other thing about office David is a I I is going to hit a couple of these industries that have been big users of office space. You think artificial intelligence is obviously coming. But what industries you think will be most affected. Legal is probably the number one industry that could be disrupted by AI. You can you can search every precedent in the history of mankind with a machine. You don't need a paralegal to do that anymore. And they'll write the brief for you. So the legal profession is probably target one. Not far behind is advertising. When the machine is going to update advertising and keep bombarding you with more and more ads with more and more offers until you take one. So humans won't be there. They'll be maybe guiding it. But it'll be it'll change advertising. It's another big user of space finance. You tell me I mean there's a buttons now on your computer. They'll be running a lot of the stuff for you. So it's it's you could fundamentally shake up permanent demand for office. Now sometimes people are saying that the best investment opportunity now is to stress real estate debt that you can buy that debt from banks at a discount and so forth. But you think it's too early for that. They're just beginning to. We were going to give back an office building and they said well not so fast. If you want a little restructure of a loan and we'll cut it alone in half and you put the money in here and we'll take this as a junior note because the banks don't want the assets back in. And why don't they want them back. Because they think it's going to go down even further. Yeah because they got to carry them. They're not set up to carry these assets right. And they got to hire someone. They got to go to the leasing themselves. It's not their business. They'd rather have a GP like your old firm Carlyle or Starwood or Blackstone hold on to the asset and try to work it out. So a lot of fortunes were made in the real estate world. No 708 when people bought distressed real estate in the late 80s to when the RTC was here. So do you see funds being formed to buy these assets. But you think they won't be available for a year or two. Well right now you have an unusual situation in real estate markets because everyone's sort of looking at the yield curve and it says rates will be lower later. Everyone says survive till 25. Hold on to your assets. So transaction volumes have plummeted. Nobody's trying it unless you have to sell something today. Nobody wants to sell anything today. They think tomorrow will be rosier. So for the most part everybody is pushing any sales back. And I think transaction buys in apartments are down 60 percent industrial down 70 percent. It's going to it's a very dry you know there's no IPOs and there's no sales in housing. Do you see a recession there because prices are going to come down at some point or you don't see a recession in housing. I think the housing markets had a very unusual situation where Powell's increase in rates has diminished supply and people. I'm not sure we've ever had a situation where so many people have locked the house have locked in their mortgage costs. So right now people are sticking in their house which has diminished the supply of homes for sale. I wonder when rates come down homes will be sold like people will start because the mortgage will no longer be a reason to hold on to the house and whether that will offset will probably be an increase in supply as the builders resume resume a more normal cycle. So maybe the housing market just stagnates for a while. But over time it's headed up. Let's suppose I'm going to invest in real estate and I'm not a wealthy person but I have some money. Should I buy a publicly traded share in a REIT. You have to operate a REIT REIT business. That's one public and one private. All right. Is that a good business to be in in terms of operating it. Is it a good thing for people to invest in a REIT. Yeah I look I think real estate has a has a nice place in the balance sheet of any individual. But I think the REITs in general in here will look really interesting. And we we in the pandemic we raised a special situations fund and bought 15 names in the REIT business and we were up like 70 percent at one point. We're going to do that again. I think if you take a long term view some of these good companies are they're good companies with the wrong interest rate environment. I wouldn't even say they have the wrong balance sheet but they are so out of favor. Every day you pick up you turn on the news and real estate real estate real estate. There's some really good buys out there. The human nature even in running a stock portfolio is to take your gains and hold your losses hoping they come back to par. And the same thing applies to real estate. You were based in the northeast part of the United States for much of your career. But you picked up and moved to Miami. Why did you do that a few years ago. And any regrets about moving to Miami. My mom's down there and I got divorced. That was one reason. Change your life. Start over. There was obviously a tax benefit to doing so. And I sold an interest in my firm at the time. I was based in Connecticut. I was based in Greenwich our headquarters. But at that time before Covid people said Barry you're moving to the part of the world. Was that people thinking you were a little bit strange. Why. Yes they did. I didn't think it'd be that hard to move and make that my base of operations. It turned out I caught the wave perfectly. I was an early settler into Miami and you know the home prices probably tripled there. I should have just bought all. I shouldn't travel the world. I should have bought everything with my house. I would have had the best performing real estate fund in the world. President United States calls you and says Barry you're a smart guy. I need a secretary of Treasury who knows real estate. And you know who's a Democrat. I assume you're a Democrat. I put myself as an independent. But if a president any president of any party then called you would you ever go into government or your work. You're a private sector person. I always serve the nation. I would. I think that you know I do think the government could use a few business people in it despite the lack of love we may have for us. I think the government has to treat itself a little like a corporation. They have a budget and they have limited resources. Now you have a 32 trillion dollar deficit. So you have to figure out what you need to get done versus what you'd like to get done. There are so many benefits to being unemployed. Now there's so many support systems that I think some people say I work part time and collect my unemployment benefits. Thirty one percent of our housekeepers we cannot find. We're paying we're paying 15 dollars an hour. We used to be paying nine an hour. And there are benefits and they don't they're not there. They're not there. So we those people are probably some of these people that may be hanging out on unemployment ranks or getting all kinds of subsidies. And we need the government to say if you're if you have a hardship and we understand we'll help you. But we should educate people. We should get train them for jobs and bring them back to a productive society. What is the best investment advice you've ever received. I was talking to one of the most successful hedge fund managers in the United States. And he said I expected him to tell me about some horrific investment he made. He lost all his money. He said not selling my winners too early. And I think about that all the time. Human nature even in running a stock portfolio is to take your gains and hold your losses hoping they come back to par. The same thing applies to real estate. You know we want. Oh we got a high IRR on this deal. We'll sell this asset pocket the 47 IRR and our our bad deals. We'll just hopefully we'll make our money back. You know this from Carlisle. We spent all our time on the bad deals. And so I think that has been. We had a portfolio a company that we were going to sell and we made nine hundred million dollars. And I said we're not selling it. My partners were furious. But this one like I had done this deal. So I said I'm holding this and sold it four years later and made a billion for. All right. What do you think the most common mistake that investors make. The average investor. Most common mistake that they sell their gains to sell soon and they sell too soon. OK. Hold on. They don't cut their losses and they hope things will get better when hope is not a business strategy. So if your mother came to you and said I have a hundred thousand dollars. I need to invest it somewhere. Where should I invest it. You would say where real estate. Well today and you look at my portfolio. I mean I have a significant amount of cash that I never had before because I'm getting 5 percent for the cash. So if you look back on your career what would you say you're most proud of. It's building one of the biggest real estate companies in the United States and the world. Your philanthropic activities your children. What is it you're most proud of having achieved. We start with my kids. I mean I'm happy with my three children. That's your legacy really. For me building star hotels not only were the best performing large cap hotel company of the 10 years I ran the company I won best lodging executive in the country. And that's just an investor magazine displacing I think six years that Bill Marriott had that award. But I build a company with a good soul. And that was the untold story of Starwood because we had to do. I said I want our hotels to be the shining light in each community we served and I made our people give back to the communities.