Barry Sternlicht, co-founder, chairman and CEO of $115 billion real estate giant Starwood Capital Group, is anxious concerning the greater than 4,000 regional and community banks within the United States. The real estate industry is combating higher rates of interest, vacancies, etc. According to the billionaire investor, their lenders of alternative may face some problems given inflation.
“I think people are looking for those cracks and you’re going to see the cracks develop now.” “You’re going to see a regional bank fail every day, or not – every week, maybe two a week,” he says said CNBC Tuesday.
Contrary to Sternlicht’s prediction, just one U.S. bank has failed to date this yr, Republic First Bank, a regional lender with branches in Philadelphia, New York and New Jersey. The bank collapsed and the Federal Deposit Insurance Corporation (FDIC) seized about $6 billion in assets and $4 billion in deposits after problems with rising rates of interest on its extensive business real estate holdings.
Sternlicht has been warning for greater than two years about impending problems as a consequence of rising rates of interest in the actual estate and banking sectors in addition to in the whole economy. In September 2022, just months after the Federal Reserve began raising rates of interest to combat inflation, he said that officials were using “old inflation data,” particularly related to the housing market, to unnecessarily attack the economy. A month later, Sternlicht followed up on these criticisms, arguing that the whole economy was “severely collapsing” as a consequence of rising borrowing costs and that a recession was all but inevitable.
But because the U.S. demonstrates its resilience to higher rates of interest and inflation through the summer of 2023, Sternlicht admitted his recession calls were premature, saying he “doesn’t understand the strength of the consumer.” However, the billionaire real estate guru still believes that certain sectors of the economy cannot withstand Fed Chairman Jerome Powell’s rapid rate hikes, including real estate and regional banks.
“He is faced with a difficult task, with a blunt tool, and the consequence is that the real estate markets are taking a shot at them because interest rates have risen so quickly. We could have handled it, but we couldn’t handle it that quickly,” Sternlicht said. “The 1.9 trillion real estate loans are currently a fragile animal.”
Call on the Fed to chop rates again
While many segments of the actual estate sector are struggling – multifamily property values, for instance Decline of 26.9% Since peaking within the second quarter of 2022, the office sector has faced more headaches than some other.
The combination of upper rates of interest (which increased borrowing costs and reduced asset values) and the rise of hybrid work (which increased emptiness rates) hit office owners particularly hard in recent times. Even starlight in January said Bloomberg The office real estate market is currently in an “existential crisis” and will suffer losses of $1 trillion. If his prediction proves prescient, it might create serious problems for regional and community banks that hold real estate debt but haven’t got the big balance sheets to handle excessive loan losses.
Several Wall Street analysts, strategists and real estate executives warned last yr of potential problems at regional banks as a consequence of underwater real estate loans. Scott Rechler, CEO of New York-based real estate investor, operator and developer RXR, told Fortune in March that regional banks are essentially facing a “slow train wreck.” As more business real estate loans come due in the following few years and values within the sector fall, banks will struggle to take care of rising loan losses, Rechler argued.
“I think there will be 500 or more fewer banks in the U.S. in the next two years,” he warned. “I’m not saying they will all fail, but they will be forced to consolidate if they don’t fail.”
For Sternlicht, a minimum of a part of this nightmare could possibly be avoided if the Fed decides to chop rates of interest. “One way to bring capital into these banks is to lower interest rates so that their assets are essentially worth more,” he said.
The billionaire CEO argued that community banks are value bailing out because they’re vital to the “fabric” of the American economy and supply loans to small businesses or farms that larger banks often ignore. The excellent news? Sternlicht believes Powell will cut rates sooner reasonably than later, potentially saving a few of these banks.
Sternlicht argued that rate of interest hikes were not having the specified effect of reducing inflation, but were as an alternative causing unnecessary damage to real estate and regional banks – and Powell is starting to acknowledge this.
He identified that almost all Americans’ mortgages are also fixed-rate with low rates of interest, “so the rise in interest rates hasn’t changed their income,” and that Fed policy doesn’t really directly affect the costs of gasoline, groceries or insurance impact – a number of the fundamental causes for this are the present bout of stubborn inflation. In Sternlicht’s view, rate of interest hikes is probably not the anti-inflation medicine they were intended to supply. Finally, with the $34 trillion national debt straining the federal government’s budget, Sternlicht argued that Chairman Powell desires to lower rates of interest to cut back interest costs. “I think interest rates will come down,” he concluded. “Powell seems to be looking for a reason to bring them down.”
