The Real Deal New York

Barry Sternlicht wants a “train wreck” in Manhattan’s luxe market, warns of less global money coming into CRE

Hedge funds, not banks, will be the victims of the fallout, Starwood boss says
By Katherine Clarke | August 14, 2017 02:10PM

Barry Sternlicht predicts that Billionaires’ Row will tank

Barry Sternlicht sees doomsday waiting at the end of Billionaires’ Row. And that could be a good thing for him.

Speaking on a second-quarter Starwood Property Trust earnings call, Sternlicht called the development of the high-end residential strip on West 57th Street an impending “debacle.” He noted the out-of-balance mezzanine loan at JDS Development and Property Markets Group’s 111 West 57th Street project and predicted more distress in the luxury residential market, including at 53 W 53, a supertall condo being developed next to the Museum of Modern Art by Hines, Pontiac Land Group and Goldman Sachs.

“We are beginning to see the cracks of the high-end residential market in Manhattan,” he said. “The Building On 57th Street just went through it’s B-lender. Those deals, and the building going up next to MoMA, those deals are going to be a disaster. So high-end resi in New York really is in trouble.”

Sternlicht TRData LogoTINY, who was quick to point out that Starwood is not exposed to that market, said it won’t be banks licking their wounds in the event of a luxury condo slump. Rather, it’s the hedge funds, private equity firms and alternative lenders chasing high returns who backed projects asking prices of $7,000 to $10,000 a foot.

“There’s a hedge fund that made $1 billion mortgages against some of these properties out of Europe and we will see how that fares,” said Sternlicht, appearing to refer to the Children’s Investment Fund, which has backed the likes of 432 Park Avenue and 76 Eleventh Avenue. “Maybe they like the return, but they will lose capital. They can’t get paid off and they find out their basis is accreting because they are not getting paid currently, obviously….That is not going to end well.”

But Sternlicht said his firm could benefit from future distress in the sector.

“I think we kind of want a train wreck,” he said. “We like those markets. We like capital getting scarce.” Starwood is an aggressive lender in New York’s commercial real estate market, backing the likes of 10 Hudson Yards and the Public hotel at 215 Chrystie Street.

His comments echo those of Vornado Realty Trust’s Steve Roth, who recently said he saw an opportunity “to feed on the carnage” in the struggling retail sector.

Sternlicht also said there’s concern among commercial real estate investors about foreign investors leaving the market amid turbulence in Washington. Property sales have declined and the gulf between asking and selling prices has widened, he said.

Those foreign investors, particularly those from Asia, bid up the price of assets dramatically and affected underwriting. He referenced Anbang Insurance Group’s purchase of the Waldorf Astoria Hotel and its purchase of Strategic Hotels & Resorts.

“All the markets price off the top bid and the top bid has been an Asian bid, whether it was the sale of the Waldorf or the bailouts of a Strategic Hotel deal. Everybody thinks they are rich when the guy pays the 2 percent cap for an asset, or a 1 percent cap. If there are six bids at $1 billion and one guy is at $1.5 billion, I would ask you to tell me where the loan-to-value is of the loan, right?”

Sovereign wealth funds may also leave the market depending on how the Trump administration handles certain issues, including its position on the Gulf countries’ dispute with Qatar, which has been accused of funding terrorism, he said.

“If you are having a fight with our administration, you are just not going to invest here,” he said. “They are very quick to shut down the capital flows… It has to do with politics.”