Barry Sternlicht, co-founder, chairman, and CEO of the $115 billion real estate giant Starwood Capital Group, is worried about the more than 4,000 regional and community banks in the U.S. With the real estate industry struggling against higher interest rates, vacancies, and inflation, their lenders of choice may be in for some pain, according to the billionaire investor.
“I think people are looking for these 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 told CNBC Tuesday.
Despite Sternlicht’s prediction, just one U.S. bank has failed so far this year, Republic First Bank, a regional lender that operated in Philadelphia, New York, and New Jersey. The bank collapsed and had roughly $6 billion in assets and $4 billion in deposits seized by the Federal Deposit Insurance Corporation (FDIC) after facing issues with rising interest rates among its sizable commercial real estate holdings.
Sternlicht has warned about pending problems due to rising interest rates in the real estate and banking sectors—as well as the whole economy—for more than two years now. In September 2022, just a few months after the Federal Reserve began raising rates to fight inflation, he said that officials were using “old inflation data,” particularly related to housing, to attack the economy unnecessarily. A month later, Sternlicht followed up that criticism by arguing that the entire economy was “breaking hard” due to soaring borrowing costs, and a recession was all but inevitable.
But with the U.S. proving its resilience to higher interest rates and inflation by the summer of 2023, Sternlicht admitted his recession calls were premature, saying that he “did not understand the strength of the consumer.” However, the billionaire real estate guru still believes certain segments of the economy can’t withstand Fed Chair Jerome Powell’s rapid rate hikes, including real estate and regional banking.
“He’s got a hard task, with a blunt tool, and the consequence is the real estate markets are taking it on the chin because rates rose so fast. We could have handled this, but we couldn’t handle it this fast,” Sternlicht said. “The 1.9 trillion of real estate loans, that’s a fragile animal right now.”
Calling on the Fed to lower rates–again
While many segments of the real estate sector are struggling—for example,…
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