As the Federal Reserve is expected to hike interest rates again next week in its attempt to curb high inflation, billionaire real estate investor Barry Sternlicht says the U.S. central bank has missed the mark.
“The sad part about what the Fed is doing is they are really emptying the ocean of the water, [hurting] the healthy blue whales” and all the others, Starwood Capital’s chairman and CEO said Tuesday at a capital markets conference hosted by New York University’s Schack Institute of Real Estate. “Everything is in trouble. I’m 62. This is the first time I can tell you with 100% conviction they are wrong.”
Higher rates this year have stalled homebuying as well as lending and other market activities.
During the pandemic, “there was all this money, $6 trillion here and $12 trillion in the world, printed and handed to consumers,” Sternlicht said. That led consumers with “too much money” to spend and shop “chasing too few goods” because of the supply chain bottlenecks, he said, adding that drove the inflation. Fast forward, retailers and other companies that had been busy ordering goods and stocking shelves because of the “pandemic surge” are now met with the reverse situation of consumers having spent their money and a glut of inventory that retailers are discounting during the holiday shopping season.
“The savings rate has gone from 33% to 2.6%,” he said, telling the story of the brother of his house manager in Miami having maxed out his credit cards. “This is happening all over the country. Now there’s no money to spend. … [Retailers] are going to keep the discounts through the end of the year because they have to clear the inventories. That’s what the data shows. So my problem with the Fed is the economy was rolling over on its own and the consumer is out of money. … The patient is going to die with the remedy they’ve selected.”
The Fed’s rate increases are leading the U.S. economy into a recession, Sternlicht told CNBC separately on Tuesday, adding Fed Chairman Jerome Powell “will see that they blew it.”
At the NYU conference, Sternlicht also addressed Starwood’s recent move to limit investor redemptions at Starwood Real Estate Income Trust, a move that’s also been undertaken by other companies including Blackstone Group.
“We don’t run a hedge fund,” Sternlicht said. “We own real property. We can’t liquidate our property overnight ... and just sell your apartments in one minute. We have to manage liquidity.”
He said Starwood Real Estate Income Trust’s performance has far outpaced that of hedge funds and many other investment vehicles.
At the conference, real estate executives and lenders echoed the sentiment that the financing market has gotten choppy even though they reiterated the notion that top-tier desirable properties will continue to get funding as part of the flight-to-quality trend.
With hybrid and remote work taking root across the country, participants agreed older commodity office properties will struggle, with some being redeveloped or turned into residential.
In a telling sign of the woes facing the office sector, Sternlicht said Starwood’s LNR, billed as the world’s largest commercial mortgage special servicer that manages troubled loans, is seeing office properties represent about half of the increase in its workload.