Starwood Capital Group CEO Barry Sternlicht predicts a shift in investor focus from artificial intelligence (AI) to commercial real estate (CRE), as noted by Matt Wasielewski of NationalCapital Markets on August 6, 2024. Sternlicht suggests that the current hype around AI, particularly in sectors like chipmakers and data centers, is unsustainable and has artificially inflated these markets. He believes that once this AI bubble bursts, CRE will become the preferred investment option.
During Starwood Property Trust REIT's recent earnings call, Sternlicht highlighted how federal infrastructure spending has skewed the economy, creating an illusion of growth driven by sectors not reflective of the average person’s economic reality. According to Sternlicht, this artificial boost has left the economy feeling “super narrow,” with the GDP primarily driven by investments in data centers and AI, rather than more tangible, widespread economic activities. He pointed out that many people don't feel the benefits of these economic trends in their daily lives.
Sternlicht has been vocal about his belief that the Federal Reserve should cut interest rates, and he expressed optimism that a recent weak jobs report might prompt the Fed to act. He argued that the current economic state, bolstered by public spending through the CHIPS Act, the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act, has created a fragile economic facade. Sternlicht believes that a rate cut could provide much-needed relief and stability, particularly for the CRE sector.
The AI excitement seemingly has already begun to cool, with the tech-heavy Nasdaq stock index falling into correction territory last week. Sternlicht said Tuesday he expects investors who abandoned real estate during the pandemic will come back to the asset class, particularly multifamily and hotels. He emphasized the inherent stability of real estate compared to the volatile nature of tech investments, noting that real estate has a “different risk profile than some new chip that may or may not live forever.”
Starwood Property Trust REIT, a primary lender in the CRE market, reported significant capital returns in recent months. The firm saw $606 million returned in the second quarter and over $620 million in July alone, a trend that indicates increasing market activity and liquidity. President Jeffrey DiModica noted, “You are definitely seeing a trend with more capital starting to be returned, which means they have the ability to refinance assets away from us, and that is a good part of the unfreezing of the markets.”
Starwood's strategic positioning has also bolstered its financial health. The company reported its adjusted debt-to-equity ratio at its lowest level in two years and $1.2 billion in cash and undrawn credit capacity at the end of the quarter. Despite these positive signs, the firm did miss analyst expectations, reporting earnings of 48 cents per share in the second quarter, down from 59 cents in the first quarter. Nonetheless, the firm's strategic diversification beyond traditional CRE into sectors like infrastructure and energy is seen as a forward-looking move.
The sentiment shift in real estate's favor has also been reflected in the stock market, where REITs have surged in recent weeks after a prolonged period of stagnation. This resurgence suggests that investors are beginning to recognize the value and potential stability of real estate investments. Sternlicht remains hopeful, stating, “For the first time, we can see the sun and the clouds breaking apart,” signaling a promising future for commercial real estate.
As Starwood prepares for an influx of commercial real estate investment, the firm is strategically diversifying outside of the sector. With 40% of the firm’s assets now outside its commercial lending book, Starwood is investing in infrastructure and energy, among other sectors. DiModica highlighted this strategic shift, noting that as these portfolios continue to perform well, the company is moving further away from being solely a mortgage REIT.
Sternlicht's outlook is a call to action for investors to reconsider the potential of CRE. The anticipated rate cuts, combined with the strategic moves by firms like Starwood, suggest that CRE is poised for a significant comeback. The critical moment Sternlicht refers to could be the turning point for the sector, provided the Fed acts swiftly to support economic stability. As the AI bubble shows signs of deflating, commercial real estate stands ready to attract investors looking for more reliable and tangible returns.
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