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 is a hurricane over real estate right now we're in the category 5 hurricane and it's sort of a black crowd 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 [Music] for billionaire real estate investor Barry Sterling the original plan was to be a lawyer I did apply to law school because my mom wanted me to be a lawyer because my brother was a doctor and then I got in and I said I wasn't going to go and she cried instead he got an MBA from Harvard and headed west to jmb Realty in Chicago sternlick 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 from the Savings and Loan crisis but Sterling is best known for building a Hospitality giant Starwood Hotels and Resorts which counted name brand chains like Weston Saint Regis and Sheridan among its portfolio I was 38 I now had a company with 120 000 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 no nobody thought you could do the first one was here in New York analysts from Prudential Securities I'll never forget this we're walking through the law 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 star would merge with Marriott in 2016 to create the world's largest hotel chain and Stern lake is back to running the Starwood Capital group and it's 115 billion dollars under management it's not always an easy feat these days as Office Buildings sit bacon and the Federal Reserve is running up interest rates at the fastest Pace in 40 years a move Stern lake has criticized they went straight vertical on rates this had happened before we saw rates go up three 400 basis points but it was more gradual this was a direct we got to stop this now you've been critical I think it's fair to say at the Federal Reserve you feel that they raised interest rates too much too quickly what should they have done in response to covid when kova came along uh I would say that um I've 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 power because as you may know they use a portion of the data they use 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 he shouldn't have negative interest rates he shouldn't been buying mortgages into May of 22 that should have stopped so much earlier that 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 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 Co confidence is down consumer confidence is down retail sales are down uh service economy is wickedly strong it feels like the last gasp before the we actually settle into what should be uh what you'd expect to be I hope it's a shallow recession I hope he can pull that off normally when you increase interest rates you decrease GDP growth and you increase unemployment your point is unemployment's 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 and construction from the infrastructure bill and you have the service sector which is still recovering the pandemic which normally would be tilting over let's go back to your beginning so where were you born um somewhere on Long Island I think Long Island okay and where did you go to high school in well I went to no I moved to Connecticut when I was five or six with my parents um and went to Public High School West Hill High School and a thousand kids 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 I think Brown was uh was a liberal arts college in brown I credit teaching me how to think I think I'm a generalist thinker I think a lot of my job has 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 also 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 uh or who's Allen and I worked there for a year and I had some assignments and then my roommate was working at Arbitrage firm on Wall Street and he was like do you want to come here and I'm like yes I want to go learn to trade so I traded the breakup of ATT I made a lot of money they told me I got 10 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 it's 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 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 jmb in Chicago so I was intrigued and seemed like a fun city and I thought I'd try something new so I went to Chicago so you were downsized by jmb 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 in my new company whatever it was and I wasn't sure I wanted to do real estate but I it was the time of the form of the SNL crisis and I decided um I'd met some people in the over the last couple years um at that time that said they backed me and I recruited a friend from business school who worked at the Trimble Crow companies to be my partner because I was the acquisition guy and he'd be the operations Guy and um we went out and bought um 8 000 units apartment units because the only thing we could buy were Apartments because we didn't have a lot of money and um 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 who started eventually became Starwood yep uh Starwood is in many different businesses you were in the lodging business you're in the lending business you're in the investment in office building and residential business right yeah so you do these through different Vehicles so let's go through the lodging part first before you um got two and well known in the real estate world you did make a very well-known real real estate acquisition in hotels and lodging when you weren't that well known you bought Weston actually maybe we're 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 The Westinghouse was having a going out of business sale and I said do you have any Apartments they said no do you have any land so we started buying land he said no do you have any hotels and they said yeah this is the portfolio we have we were it's under contract to a group in Boston but it hasn't closed yet so I went to see that fellow um chick Hill in Memphis Tennessee and I convinced him that we would be more fun so I took control of the company by buying the debt um and then folded in a whole bunch of our assets into that company and that became Starwood Hotels we changed the name first to start with lodging and it had eight million dollars market cap in three years I think it was five billion that company bought Western hotels in 95 which we actually had bought privately with Goldman Sachs and we took it public we bought it into Starwood Hotels now we were seven billion dollar company and in 1998 I made a bid for ITT Sheridan which was a 14 million art company when I was 30 E8 I now had a company with 120 000 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 thing 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 Starwood Capital group and then that business took off and grew so do you come up with the ideas for these new hotel Concepts yeah they do that so uh what was the idea behind baccarat I'm familiar with so it was a luxury kind of brand and W was more hip yeah at the time I was friends with Ian Schrager and he done these hotels but what the Mondrian 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 um it's the W on Lex behind the Waldorf um and the analysts from Prudential Securities I'll never forget this we're walking through the lab because what are you gonna 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 and there's and I outsourced restaurants surreal 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 boxer out 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 unless you have to sell something today nobody wants to sell anything today they think tomorrow will be Rosier foreign 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 12.9 percent of office space in the U.S sat vacant according to data from co-star 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 1.4 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 Optus 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 in most of the asset classes in real estate are okay right now in the United States the apartment Market the 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 and the supply of credit to the industry is curtailed dramatically so um it's I like to say as a hurricane over real estate right now or in the category five hurricane and it's sort of a blackout 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 covet 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 employ for their tenants do you think that's true or 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 I just we have some Investments offshore and I was just looking at rents are up and vacancy rates in the top Europe German property markets Berlin Frankfurt Munich hamburger less than five 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 the cities as currently destitute as San Francisco from an office Market perspective the best buildings are still leased 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 grain or something it'll be 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 LA Downtown LA Downtown San Francisco the city that are difficult to commute to that's where the pressure's 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 hq2 they're expecting people in those offices four days a week come the fall so the other thing about office David is ai ai 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 effective 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 buttons now on your computer they'll be running a lot of the stuff for you so it's it's it 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 the the debt from banks at a discount and so forth but you think it's too early for that they're just beginning to you know we were going to give back an office building and they said well not so fast if you want to we'll restructure alone 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 and 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 go hire someone they got to go the leasing themselves it's not their business they'd rather have an 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 you know 708 when people bought distressed real estate and all in late 80s too 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 the real estate markets because everyone's sort of looking at the yield curve and it says rates will be lower later everyone says you know survive till 25 hold on to your assets so so transaction volumes have plummeted nobody's trying 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's pushing any sales back and I think transaction advising apartments are down 60 percent industrial down 70 percent it's gonna 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 I think um the housing markets had a very unusual situation where Powell's um increase in rates has diminished Supply and people I'm not sure we've ever had a situation where so many people have locked that how have locked in their mortgage costs so right now people are sticking in their house which is diminish 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 a more normal cycle so maybe the housing market just stagnates for a while but it over time it's headed up right let's suppose I'm I'm an invest in real estate and I'm not a wealthy person but I have some money should I buy a has publicly traded share in a read you have you operate a Reit uh read businesses that's one public and one private all right is that a good business to be in in terms of of operating it is it a good thing for people to now invest in a read yeah I like 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 La in the pandemic we raised a special situations fund and bought 15 names in the read business and we were up like 70 percent at one point um we're gonna do that again we 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 even I wouldn't even say they have the wrong balance sheet but they are so out of favor only every day you pick up you turn on the news in 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 foreign 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 um but at that time before covid people said Barry you're moving to another part of the world yeah was that people thinking you were a little bit strange well 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 it was a early settler into Miami and you know the home prices probably tripled there I should have just bought all I shouldn't have traveled the world I should have bought everything with my house I would have had the best performing real estate Fund in the world the president United States calls you and says Barry you're a smart guy I need a Secretary of Treasury who knows real estate and uh you know who's a Democrat I assume you're a Democrat I put myself as an independent right now okay but if at present any president of any party then called you would you ever go into government or you're a private sector person I always serve the nation I would I I think that you know I do think the government could use a few business people and 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'll work part-time and collect my unemployment benefits 31 of our housekeepers we cannot find that we're paying we're paying 15 an hour we used to be paying nine and now we're 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 being a backed in a productive Society what is the best investment advice you've ever received hmm um I I was talking to one of the most successful hedge fund managers in the United States and and he said I expected him to tell me about some horrific investment he made and lost all his money he said not selling my winners too early and I think about that all the time but 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 know we 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 they'll we'll make our money back and you know this from from Carla we spend all our time on the bad deals and and so I think that has been um we had a portfolio a company that we were going to sell and we made 900 million dollars and I said we're not selling it my partners were Furious um but this one like I had done this deal so I said I'm holding this and we sold it four years later and made a billion four 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 soon and they sell too soon okay they 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 if you look at my portfolio I mean I have a significant amount of cash that I never had before because I'm getting five percent for the cash so as 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 um 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 um that's your legacy really uh for me building started hotels not only were the best performing large cap Hotel company of the 10 years I ran the company I won a best lodging executive in the country in Institutional Investor magazine displacing I think six years that bill Marriott had that award um but I built 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 foreign

Channel: David Rubenstein

Views: 102,383

Keywords: Bloomberg

Id: FN0eOHyPzs8

Length: 24min 6sec (1446 seconds)

Published: Wed Jul 26 2023