What a timely conversation.
David, what did very stern 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 five 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
of years or so, Barry certainly 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 on the buildings. And the landlords aren't going to be on
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 for the banking community and the real estate community.
There's a suppleness to very stern links career folks.
If you're just joining us, this is the conversation.
There I'd like to say to Mr. Rubenstein that will extend this
discussion for one hour. But John Farrow would be upset by that
at 900. David Rubenstein, this is so important.
Who is very stern like and why do people like you lean forward?
Barry Stern 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 and ultimately sold that to Marriott.
But Starwood Hospitality was for a long time, one of the largest hotel
companies. United States consisted of major brands
like Westin and Sheraton, among others. He also invented the W brand, which is
now owned, in fact, 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. And he would say a lot of it has 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. And so he made his name, I would say,
initially in the late 1980s, buying distressed real estate from the RTC.
And I suspect he thinks there's going to be a lot of distressed real estate in
the next couple of years as well. Hopefully, he hopes it's not going to be
his real estate did well. Okay, But distressed real estate, David
Rubenstein clearly means the Japanese show up.
We're beginning to see that crane seizure.
Hughes over cranes writing out new Japanese interest in the island of
Manhattan as well. Well, history repeats 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 the, 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 buildings, the
property values are 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 very stern,
like an optimist. And I guess the durability of work from
home and the migration of commercial real estate office to individual
residences, does he think we can 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. 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.
Right. I've known him for quite some time.
And he's 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 still in pretty good shape.
A very stern look in 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 I'm sure you can afford it.
But I would say that the hotel business has been has coming back from from the
depths of a of the of the Covid a period of time when essentially nobody was
using hotels and the stock price of hotel companies were way, way down.
Now, hotels are coming back because we're seeing in the United States
enormous amount of spending on discretionary travel, on discretionary
going away from home kinds of things restaurants, amusement parks, hotels.
And so the spending is up quite nicely in that area.
And hotel 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 he's really helped create a number of brands, not only W, but he
also created the back of that 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 to matter was iconic at UBS with
Morrie Harris. He now holds court at MetLife, drew us
with exceptional optimism on the American economy, looked for long term
growth. It 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
an economy of our size. We did grow at 6% at one quarter after
the after Covid because we were so low. But right now, I think economies of our
size, real GDP growth, 2%, is probably realistic.
