The Storms Surrounding Commercial Real Estate

What a timely conversation, David. What did Barry Sternlich say about the commercial real estate debacle to come? Well, he thinks it's going to be a, you know, hurricane, you know, kind of a Category 5 hurricane. What you have is a combination of people not going back to work physically and people really, because of higher interest rates, not valuing buildings as much as they used to. So the result is you have an enormous amount of commercial office space in this country that's worth a fraction of what it was supposed to be worth. And at some point over the next couple years or so, Barry Sternlich would say and others would say as well, this real estate is going to have to go into default in some way or another. The banks are not going to be able to really justify the debt that they have on the buildings, and the landlords aren't going to be able to pay the debt. So you're going to see a very large effort to, I say, sell a lot of this debt at discounts, and it's going to cause some problems in the banking community and the real estate community. There's a suppleness to Barry Sternlich's career, folks. If you're just joining us, this is the conversation that I'd like to say to Mr. Rubenstein that will extend this discussion for one hour, but John Farrell would be upset by that at 9-0-0. David Rubenstein, this is so important. Who is Barry Sternlich, and why do people like you lean forward? Barry Sternlich is one of the major forces in the U.S. real estate market. He built a very large company in the commercial office building and commercial real estate world, but he also built a large hotel company. He ultimately sold that to Marriott, but Starwood Hospitality was, for a long time, one of the largest hotel companies in the United States. It consisted of major brands like Westin and Sheridan, among others. He also invented the W brand, which is now owned, in effect, by Marriott. But even when he sold all that to Marriott, he kept his real estate company, which is now one of the largest in the United States, and it owns enormous amounts of properties across the spectrum of real estate properties. He would say a lot of it is struggling. He has turned some buildings back to the lenders, as most real estate developers and owners of real estate are beginning to do, unfortunately. He made his name, I would say, initially in the late 1980s, buying distressed real estate from the RTZ, and I suspect he thinks there's going to be a lot of distressed real estate in the next couple years as well. Hopefully, he hopes it's not going to be his real estate. Well, okay, but distressed real estate, David Rubenstein, clearly means the Japanese show up. We're beginning to see that crane, C.J. Hughes, over at Cranes, writing out new Japanese interest in the island of Manhattan as well. Will history repeat itself in our commercial real estate debacle where the foreigners show up? Well, usually what happens is foreigners show up before the debacle occurs, not after the debacle occurs. Right now, I think you're seeing a slow diminution in values in office buildings. Anybody who's watching this show knows that when you go to a major office building in New York or other major cities these days, you don't see a lot of people there, and therefore, eventually, the people using that real estate are going to say, I don't need as much space as I used to because people are working from home three days a week or two days a week, and therefore, I'm going to shrink in my next lease the amount of space I have, and therefore, you're going to see enormous shrinkage in, I think, the usage of office buildings, and as a result, the values of the leases are going to go down, and as a result, the building's property value is going to go down as well. In some cases, the banks are going to be forced to take over the building because the landlord can't afford to service the debt any longer. This is going to take place over another two or three years or so. Is Barry Sternlicht an optimist on, I guess, the durability of work from home and the migration of commercial real estate office to individual residences? Does he think we could pull that off? I think he thinks we're not likely overnight to be able to go right back to the five days a week and using all the space we used to, and so I think he's quite cognizant of the fact that the world has changed. In the United States, outside the United States, he would say people are going back to offices, and it's not quite the phenomenon we have in the United States. For a number of reasons, in the United States, you don't see people going back to the office five days a week, with very few exceptions. But he's a very talented real estate investor. I've known him for quite some time, and he also moved his entire operations from the Northeast to Miami, ahead of everybody else moving to Miami. So he was ahead of the curve there, as he is in many other areas, and I think he's operating quite effectively down there. His company now has over $100 billion of real estate properties, and while he has given some of them back to the lenders, on the whole, I think he's in pretty good shape. Barry Sternlich on the hotel business. Of course, Starwood is iconic there within hotels. What did he say about the future of hotels? All I know, David, is every time I call a hotel, the price is dramatically higher than it was 12 months ago or 24 months ago. Well, because they know you're going to stay there, they probably are jacking up the rate. Thank you. Because they're sure you can afford it. But I would say that the hotel business is coming back from the depths of the COVID period of time, when essentially nobody was using hotels, and the stock prices of hotel companies were way down. Now hotels are coming back because we're seeing in the United States an enormous amount of spending on discretionary travel, on discretionary going away from home kind of things, restaurants, amusement parks, hotels, and so the spending is up quite nicely in that area, and hotels are coming back. He's not so much in the hotel business as he was, but he's a leading light in terms of his thought processes, and he's really helped create a number of brands, not only W, but he also created the Baccarat Hotel brand as well. David, in the time we've got left, I've got to bring up a bombshell interview earlier this morning. Drew T. Mattis was iconic at UBS with Maury Harris. He now holds court at MetLife. Drew Mattis, with exceptional optimism on the American economy, looked for long-term growth that would approach 3% real GDP. That's a hugely optimistic view out of American exceptionalism. Do you share that optimism that we underplay what our real GDP growth is and what it will mean to our financial system? Well, that's a very high real GDP growth. An economy of our size, real GDP growth probably around 2% or 2.2%, 2.3% is probably realistic in the current environment. I think 3% or greater real GDP growth when inflation is still reasonably high I think is quite a high growth because if you have 3% inflation and you're saying 3% real growth, that's really 6% GDP growth the way it's measured, and I think that's probably not likely in an economy of our size. We did grow at 6% at one quarter after COVID because we were so low, but right now I think economies of our size, real GDP growth, 2% is probably realistic.