Barry Sternlicht, co-founder, chairman and CEO of $115 billion real estate giant Starwood Capital Group, is concerned about the health of the more than 4,000 regional and community banks in the United States. As the real estate industry grapples with higher interest rates, vacancies and inflation, the billionaire investor says his lenders could face some challenges.
“I think people are looking for those cracks, and now you’ll see cracks developing. You will see a regional bank fail every day or not every week, maybe twice a week,” he said. told CNBC Tuesday.
Despite Sternlicht’s forecast, only one U.S. bank has failed this year: Republic First Bank, a regional lender operating in Philadelphia, New York and New Jersey. The bank failed and had about $6 billion in assets and $4 billion in deposits seized by the Federal Deposit Insurance Corporation (FDIC) after it ran into problems with rising interest rates among its large commercial real estate holdings.
Sternlicht has been warning for more than two years about the unresolved problems associated with rising interest rates in the real estate and banking sectors, as well as throughout the economy. In September 2022, just months after the Federal Reserve began raising rates to fight inflation, he said officials were using “old inflation data,” especially related to housing, to make baseless attacks on the economy. A month later, Sternlicht continued this criticism, saying that the entire economy was “breaking badly” due to soaring borrowing costs, and a recession was all but inevitable.
But with the U.S. proving resilient to higher interest rates and inflation by the summer of 2023, Sternlicht acknowledged his calls for a recession were premature, saying he “doesn’t understand the power of the consumer.” However, the billionaire real estate guru still believes some parts of the economy won’t be able to withstand Fed Chairman Jerome Powell’s rapid rate hikes, including real estate and regional banking.
“He’s facing a difficult task with a blunt instrument, and as a result, property markets are taking it in stride because rates have risen so quickly. We could have handled it, but we couldn’t handle it as quickly,” Sternlicht said. “1.9 trillion in real estate loans is a fragile animal right now.”
Again a call for the Fed to cut rates
While many segments of the real estate sector are struggling, multifamily property values, for example, are falling. decrease by 26.9% compared to the peak of the second quarter of 2022 – the office sector has faced more headaches than any other.
The combination of higher interest rates (which increased borrowing costs and lowered asset values) and the rise of hybrid work (which led to higher vacancy rates) has hit office owners particularly hard over the past few years. In January Sternlicht even told Bloomberg The office real estate market is currently experiencing an “existential crisis” and could suffer losses of $1 trillion. If his forecast turns out to be prescient, it will spell serious trouble for regional and community banks that have real estate debt but don’t have the large balance sheets to handle excessive loan losses.
Many analysts, strategists and real estate industry leaders on Wall Street warned of potential problems at regional banks due to underwater real estate loans last year. Scott Rechler, CEO of New York-based investor, operator and developer RXR, said: Luck In March, regional banks essentially faced a “slow-moving disaster.” With wave after wave of commercial real estate loans coming due over the next few years and sector values plummeting, banks will have a hard time keeping up with mounting loan losses, Rechler said.
“I think there will be … 500 or more fewer banks in the United States in the next two years,” he warned. “I’m not saying they will all fail, but if they don’t fail, they will be forced to unite.”
Sternlicht said at least some of this nightmare could have been avoided if the Fed had decided to cut interest rates. “One way to attract capital to these banks is to lower rates, which essentially increases the value of their assets,” he said.
The billionaire CEO argued that community banks are worth saving because they are critical to the “fabric” of the American economy, providing loans to small businesses or farms that larger banks often ignore. Good news? Sternlicht believes Powell will cut rates sooner or later, potentially saving some of these banks.
Sternlicht argued that raising interest rates was no longer having the desired effect of reducing inflation, instead causing unnecessary damage to real estate and regional banks—and Powell is beginning to understand this.
He noted that most Americans’ mortgages also have fixed low interest rates, “so rising rates haven’t changed their incomes,” and Fed policy doesn’t actually directly affect gas, food or insurance prices, some of the key categories. causing the current bout of stubborn inflation. Raising interest rates may not be the anti-inflationary cure it is supposed to provide, Sternlicht said. Finally, with $34 trillion in national debt weighing down the federal government’s budget, Sternlicht said Chairman Powell will want to lower interest rates to reduce interest costs. “I think rates will go down,” he concluded. “Powell looks like he’s looking for an excuse to destroy them.”