Sternlicht sees “remarkable” opportunities, but also a “minefield”

As inflation and rents come down, Barry Sternlicht is gearing up to take advantage of opportunities.

Sternlicht, the billionaire chairman and CEO of Starwood Property Trust, said on the company’s third-quarter earnings call that Starwood could be in “one of the best lending environments” since the firm was created in 2009.

“The regional banks, which have loaded up on a trillion-nine of real estate debt, and the money center banks are getting tremendous pressure from the [Treasury Department’s] OCC and [Jerome] Powell’s Federal Reserve group, the FDIC, to reduce their exposure to real estate,” Sternlicht said.

That creates “remarkable opportunities for private credit” such as Starwood, he added.

Still, Sternlicht said Starwood will be cautious — echoing statements he made a year ago.

“We are being careful because it is a minefield out there,” he said. “There are a lot of situations today out in the marketplace where you can see there could be trouble.”

The wildcard economic factor is oil prices, Sternlicht said.

“I think we’re all sort of scratching our heads with oil around $80 [a barrel], with the situation in the Middle East,” he said. “You cannot forecast what might happen to inflation.”

Jeff DiModica, president at Starwood Property Trust, said the company would “love” to work with banks on special servicing assets.

“Hopefully the FDIC is listening and they give us a call,” DiModica said. “There are certainly lots of property owners, pensions, insurance, other investors, large, large players who could use our help.”

Sternlicht agreed.

“You can see we’re going to get a lot of business. It won’t be as profitable as it was before because the CMBS securities — the loan documents have changed,” he said.

Starwood said it has deployed $2.7 billion over the past year.

The real estate investment trust, based in Greenwich and Miami Beach, reported $47.4 million in third-quarter earnings, or 15 cents per share, down 76 percent from the same period last year. Starwood reported $521.5 million in revenue, up about 25 percent from the third quarter last year.

Sternlicht also offered his take on the multifamily and office markets, and WeWork.

“We will make more money in my view if we can take these assets back,” he said, speaking generally. “We look at that as sort of an opportunity and not a bad thing.”

Multifamily is “definitely going to be a favorite for institutional investors going forward. You can’t take a $3 trillion asset class like office [and] shut it off from investment. Real estate capital is gonna have to go somewhere.”

Sternlicht predicted co-working giant WeWork, which filed for Chapter 11 bankruptcy this week, will survive.

“The shared office space business is a real business and WeWork has a global brand, so my guess is they will reorganize and they will come out as a profitable entity, much smaller than they went in,” he said.

Office is “still a four-letter word” or close to it, Sternlicht said. But he didn’t rule out lending to office properties.

DiModica cited the “massive bifurcation between Class A and Class B” office, where the “best buildings” are securing high rents and Class B properties are struggling.

“We’ll have to explain every office loan we make to you,” Sternlicht said. “I’d say at the moment it’s not really our top choice of things to invest in, but not never.”

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