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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: We're happy to say Barry sternlike joins us now from

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Speaker 2: the FII Priority Miami Conference, and he is the CEO

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Speaker 2: of Starwood Capital Group. Barry, since the last time you

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Speaker 2: spoke publicly about this dynamic, the markets expectations for rate

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Speaker 2: cuts have trained dramatically, and you have more and more

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Speaker 2: investors even thinking that there's a possibility of a rate hike.

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Speaker 2: How do you think of that possibility.

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Speaker 1: I don't think we'll see a rate hike, and we'll

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Speaker 1: see if January turns out to be a blip in

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Speaker 1: the strength of the economy. I think you have two

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Speaker 1: economies clashing. You have the private economy and the public economy.

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Speaker 1: Public being driven by public spending, and whether it's the Infrastructure,

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Speaker 1: Build a Climate Act, the Chips Act, or the leftover

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Speaker 1: money from the America's Recovery Act, there's still a ton

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Speaker 1: of fiscal spending. In the meantime, companies are beginning to

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Speaker 1: hunker down. You're seeing a series of layoffs. I think,

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Speaker 1: so the practicality of keeping rates this high. I do

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Speaker 1: think you'll see inflation come down materially towards now soon.

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Speaker 1: And I think Because of that, the Fed's going to

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Speaker 1: be faced with a decision it can leave rates where

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Speaker 1: they are. The non capital intensive parts of the economy,

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Speaker 1: which i'll call the Fab seven. These companies have great

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Speaker 1: balance sheets, their technology is not necessarily or heretofore has

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Speaker 1: not sort of been capital intensive. It is at the

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Speaker 1: moment because many of these companies like Amazon are building

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Speaker 1: out amazing data center infrastructure businesses that are hugely capital intensive,

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Speaker 1: and Microsoft and in Nvidia themselves recently that Google. All

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Speaker 1: these companies are actually spending money, and that is actually

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Speaker 1: it's such a race, and it's so right now that

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Speaker 1: it is booing the markets and keeping construction jobs busy.

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Speaker 1: But you have a huge wave of apartments completing almost

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Speaker 1: a million apartments this year, seventy percent this year, thirty

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Speaker 1: percent next year in the first half, and I think

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Speaker 1: it's easy to see over the horizon and see that

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Speaker 1: they'll be almost less than two hundred thousand apartments being started.

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Speaker 1: So industrial starts have stop a phone, seventy percent, apartment

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Speaker 1: starts will fall sixty five to seventy percent. Housing starts

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Speaker 1: are stolling again because rates arising. So I do think

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Speaker 1: the economy is softening and they do think the FED

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Speaker 1: Chippy Janet Yelling, she's changed her tune recently. You've heard

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Speaker 1: her talk a little about the regional banking market. I

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Speaker 1: think they're worried at the one point nine trillion dollars

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Speaker 1: of loans these banks are holding real estate loans, which

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Speaker 1: is up materially since pre pandemic levels and valuations are

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Speaker 1: obviously down, So there is a giant skeleton in the

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Speaker 1: closet in the regional banks. I think the FED is

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Speaker 1: aware of that. And then they themselves have a thirty

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Speaker 1: four trillion dollar deficit that they have to finance, and

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Speaker 1: they can finance it at five point three percent, or

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Speaker 1: they can finance it at war Arry.

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Speaker 2: We can get back to the defictations up to them,

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Speaker 2: And I also want to welcome in our radio audiences

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Speaker 2: as well to this conversation with Barry Stern, like the

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Speaker 2: CEO of Starwarck Capital, we're talking about the opportunity that

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Speaker 2: people have to really put money to work and shore

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Speaker 2: up capital in this environment right now. But you have

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Speaker 2: really pointed to the existential crisis in property in the

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Speaker 2: office market, and now we're seeing even parts of the

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Speaker 2: residential market see some pains as well, where are those

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Speaker 2: skeletons hiding.

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Speaker 1: It's not clear exactly. I think there are some offshore investors,

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Speaker 1: particularly in Asia, that took junior slices of debt and

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Speaker 1: they'll be the first to lose money whether it Some

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Speaker 1: of these are in Korea, to some extent Singapore, So

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Speaker 1: there's that. Then there's the pension plans that are in

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Speaker 1: the core funds in the United States and individuals that may

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Speaker 1: own small properties. Most of the regional banks are lent

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Speaker 1: to smaller operators, and every piece of real estate is

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Speaker 1: worth less when interest rates go at five hundred basis

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Speaker 1: points now, and no sector of real estate in the

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Speaker 1: United States other than data centers are rents really rising

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Speaker 1: rapidly today. So you're in a stall pattern for closures

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Speaker 1: in January just announced. I just saw it on the wires,

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Speaker 1: up seven ten percent. So it is a US phenomenon. Really,

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Speaker 1: the issue with office that is a US situation. Offices

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Speaker 1: are full in Europe, they're full, in Asia, they're full

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Speaker 1: in the Middle East. I'm at the FAI conference. I

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Speaker 1: can tell you they're all back to work. Americans are

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Speaker 1: not back to work, and that's that's causing a significant

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Speaker 1: stress on the office market. It's not only that the

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Speaker 1: markets are about eighteen percent vacant, on shadow vacancies are

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Speaker 1: like twenty three. So there's no asset glass in real

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Speaker 1: estate in the United States that's in as much strain

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Speaker 1: as the office markets. And there are no lenders, so

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Speaker 1: if you want to sell a building, you can't get

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Speaker 1: financing for the building because all the banks, the commercial banks,

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Speaker 1: the big ones and the small ones are trying to

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Speaker 1: reduce their exposure to office which makes lending a very

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Speaker 1: interesting thing but very hard to buy unless you're a

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Speaker 1: high networth family just buying a building and putting it

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Speaker 1: away as an unlevered investment in your trust. So which

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Speaker 1: people are doing. And in the office markets you have

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Speaker 1: the really good buildings which are at least and they're full,

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Speaker 1: and then everything else, and the office markets will look

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Speaker 1: a lot like the ma all market in the United States,

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Speaker 1: where there are great malls that tenants fight to get

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Speaker 1: in and then malls that tennants can't wait to get

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Speaker 1: out of because they're going to the abyss. So I

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Speaker 1: think office is also blocked by block, city by city,

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Speaker 1: And what the quality of the building is is a

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Speaker 1: ESG complyingt is it a leader in its field, and

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Speaker 1: good buildings are holding their tenants and they're full and

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Speaker 1: most every city and those Eventually, I think capital will

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Speaker 1: come back and finance and the markets will stabilize. But

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Speaker 1: there's a lot of B and C office buildings that

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Speaker 1: just do not have demand today, and we'll have to see.

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Speaker 1: Those losses are spread primarily in the smaller buildings, in

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Speaker 1: the regional banks, in commercial mortgage backed securities, in insurance companies.

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Speaker 1: Probably not that bad because insurance companies never got that

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Speaker 1: aggressive and maybe they were loaning fifty sixty percent and

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Speaker 1: the commercial banks. I think the commercial banks are also

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Speaker 1: nervous about some of their office exposure.

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Speaker 3: Well, Berry, I want to talk about some of your portfolio,

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Speaker 3: because of course one of your reached, the star Ward

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Speaker 3: Property Trust. It reported earnings today and if you take

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Speaker 3: a look at the earnings call, there were some interesting

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Speaker 3: nuggets in there. For example, you had an executive mentioned

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Speaker 3: two foreclosed buildings vacant building in La a Houston office tower.

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Speaker 3: They were both in active discussion to be sold. Those

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Speaker 3: deals fell through. What happened there and what does that

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Speaker 3: say about the current market for property sales?

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Speaker 1: I think I think it's absolutely emblematic of the markets today.

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Speaker 1: Both there were very willing buyers at at an attractive

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Speaker 1: number for us. Basically we will probably land fifty or

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Speaker 1: sixty percent of original value, but the billings are declined

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Speaker 1: forty percent, and my number of a trolling losses is

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Speaker 1: thirty off the value, and of course that includes leverage,

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Speaker 1: so it doesn't have to go down that much to

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Speaker 1: lose that much equity. But in that case, you know

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Speaker 1: that building in La we took a I think the

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Speaker 1: original basis was like four hundred, our loan was like

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Speaker 1: two forty, and now we've written it down to one

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Speaker 1: hundred and fifty million dollars and it's going to be

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Speaker 1: converted probably to a residential building or maybe even a

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Speaker 1: data center. It's downtown LA. But I think that is

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Speaker 1: the buyers can't find financing though, and if financing, if

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Speaker 1: you're going to borrow, you know they're gonna want ten

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Speaker 1: percent eleven send money today, and many buyers just walk

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Speaker 1: and say, I'll just wait for rates to come down

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Speaker 1: and then they'll come back. So I think you see

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Speaker 1: transaction buying the United States have fallen sixty five seventy percent,

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Speaker 1: and everybody wants to wait till the second half of

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Speaker 1: this year. So if you don't have to sell today,

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Speaker 1: why would you sell. You're going to get a distressed price.

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Speaker 1: And I think our view is the mortgage reet is

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Speaker 1: in good shape. We have one point two billion dollars

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Speaker 1: of liquidity, so we can we our sales will reposition

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Speaker 1: these assets and sell them off in due course and

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Speaker 1: put the capital back to work and other uses. But

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Speaker 1: we're you know, it's a very good time to be

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Speaker 1: a lender because the banks are pulling back and the

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Speaker 1: regional banks are almost out of business, it seems like

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Speaker 1: in real estate, and many of the money center banks

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Speaker 1: and investors are nervous, so they want to reduce their exposure.

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Speaker 1: Not just investors, the government's all over them. The OCC

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Speaker 1: and the FDIC are looking at them and saying, reduce

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Speaker 1: your exposure. That's usually a really good time to be

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Speaker 1: an investor and a lender, right when everyone else is

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Speaker 1: running away. But the banks, you know, nobody's going to

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Speaker 1: their credit committee at a bank and saying, I have

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Speaker 1: this great office loan today, even if it's a great

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Speaker 1: office line today. And I'd argue the risk reward of

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Speaker 1: making the right loans to the right ten and the

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Speaker 1: right city on the right block. It's probably pretty attractive today.

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Speaker 1: So we're anxious to go back on offense. But right

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Speaker 1: now we're playing defense.

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Speaker 3: Appreciate the clarity there, and we're up against the clock.

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Speaker 3: But before we let you go, of course, we do

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Speaker 3: want to talk about politics because we're speaking to you.

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Speaker 3: You're coming from Miami. You've co shared some fundraisers for

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Speaker 3: Nikki Haley. Are you still supporting Haley and how long

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Speaker 3: do you plan to support her?

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Speaker 1: If so, I think I think unlike most of the nation,

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Speaker 1: who would like two other candidates of and you know,

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Speaker 1: I think it's we don't know what's going to happen,

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Speaker 1: whether Biden will make it to the premier because of age,

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Speaker 1: and some of the politics of the situation I think

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Speaker 1: is business leaders, you know, we think we ought to

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Speaker 1: be more. I'd say we should be making friends first

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Speaker 1: and argue later. So regarding China, I think there's so

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Speaker 1: much interest in actually seeing if we can agree we're

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Speaker 1: both better off with peace and we can't afford a war,

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Speaker 1: so we can fight later. And I think Nikki on

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Speaker 1: several issues, I don't agree with most any politicians and everything,

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Speaker 1: but I certainly agree with their stand on the Middle

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Speaker 1: East and and Iran, and and and sanctions that are

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Speaker 1: required to keep them from from financing the people that

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Speaker 1: want to hurt us uh here in the United States

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Speaker 1: and the Western world, and in fact, obviously the democracy

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Speaker 1: is in the Middle East. So I'm yes, I will see.

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Speaker 1: I mean, I don't think anybody knows what will happen

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Speaker 1: with President Trump's legal challenges and and and and you know,

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Speaker 1: the left part left side of the Democratic Party is

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Speaker 1: not for me. So you know, I'm not a socialist,

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Speaker 1: and I one thing that really makes me angry is

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Speaker 1: calling these people progress this because they're really communists and socialists,

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Speaker 1: and we should just call them communists and socialists. What's

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Speaker 1: progressive about what their policies are. There's no progressive. It's

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Speaker 1: one of the great label acts of all time. So

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Speaker 1: I'm not a far left wing and I think unfortunately

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Speaker 1: they've taken too much. The parties are splintering to the

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Speaker 1: far left and far right, and I would love to

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Speaker 1: see a moderate candidate, so would most of America. Half

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Speaker 1: the nation's independent, and I'm in that camp. I'm in

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Speaker 1: the independence So I think if ever was the third

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Speaker 1: party candidate, this would be the year