By Eric Liang '17 and Andrew Kim '16

Barry Sternlicht, Chairman and CEO of Starwood Capital Group, provided the opening keynote at the 8th Annual Columbia Business School Real Estate Symposium. Addressing a packed auditorium of industry professionals, faculty, and alumni of Columbia Business School, Mr. Sternlicht offered his thoughts on the macroeconomic investment climate and its relationship to the current state of the real estate markets.

Diving into his view of the current environment, Mr. Sternlicht began by stating that “it has never been more important to look at the macros.” Regarding the New York commercial real estate market, he highlighted how the hospitality and retail sectors are hurting from the strong US dollar. The greenback has risen 35% over the past two years against the Canadian dollar, a huge disincentive for Canadian tourists who outnumber Chinese tourists visiting New York ten to one. Mr. Sternlicht believes low to negative yields in the US and European treasuries and a lack of investment alternatives have been driving foreign capital into US real estate. In his conversation with a major Hong Kong investor, Mr. Sternlicht noted the investor’s decision to buy a property at a three percent yield versus a five percent yield in order to reallocate from existing holdings in US Treasuries. Given how capital flows are overwhelming fundamentals in the short run and the high liquidity of global capital, Mr. Sternlicht emphasized the importance of understanding how foreign capital thinks and its movements. This global capital has largely ignored real estate fundamentals such as demand and absorption and has viewed real estate as an alternative asset class, even as a proxy for bonds. Whereas US institutions tend to have a defined allocation to real estate, foreign investors often do not and will “whipsaw” in and out of asset classes.

Regarding interest rates, Mr. Sternlicht predicted that the Fed will increase rates by 25 basis points at the December meeting but clarified that their decision is primarily based on maintaining market credibility. He also opined that interest rates will need to stay low in the near term for several reasons. Unemployment will likely increase after energy producers work off their hedges and ramp up layoffs while banks with energy sector exposure will also have problems. Meanwhile, the precipitous drop in oil and commodities’ prices and the on-going slowdown of China’s economy will create deflationary pressures. As an aside, Mr. Sternlicht thinks that Chinese companies rushing capital out of the country are attempting to sidestep future Chinese currency devaluations meant to catalyze growth. The market seems to agree with Mr. Sternlicht’s view as the 30-year US Treasury yield continues to hold below three percent.

Mr. Sternlicht next turned his attention to the commercial real estate markets. He pointed to four signals suggestive of being in the late stages of a real estate cycle: 1) increased M&A activity indicating a lack of accretive investment opportunities, 2) credit yields expanding particularly in CMBS, 3) outlier bids for assets with no cover bid, and 4) lofty technology company valuations reminiscent of the last bubble. Quoting Steve Roth of Vornado, Mr. Sternlicht said, “a late cycle is when stupid people do stupid things and get rewarded; the end of the cycle is when smart people do stupid things and lose money.”

Mr. Sternlicht also touched on the progress of Starwood Capital’s investment funds. Fund VIII was $3.0 billion and had invested 93% in US, with a smaller allocation to London and a deal in Brazil. Fund IX is allocated 66% to the US and 33% to Europe. His latest Fund will likely be evenly split between the US and Europe. Across property sectors, Mr. Sternlicht sees retail performing quite well with Starwood’s mall holdings up three percent on same-store sales. Hotel portfolio revenue is up five percent, a commendable result given they are exposed to a broad swath of the country. Starwood Capital’s office holdings are largely stabilized and he sees rents continuing to recover. Markets like Portland, Orange County, and the Research Triangle have strong secular drivers with significant constraints on new supply. In addition, apartment rents are rising quickly and Mr. Sternlicht continues to view this sector favorably. He also expressed his bullishness on the Starwood Capital’s infrastructure investments, sharing anecdotes about two wildly successful deals that connected New York City and later, Long Island to the national power grid.

On emerging markets, he believes these investments are largely currency plays. He brought up the Brazilian Real trading at a forward rate of six Reals to the US Dollar, compared to two Reals to the Dollar just a few years ago. Deals that pencil out in local currency terms will end up losing money on the conversion. He contrasted this with India, where Modi’s election actually flattened the forward curve from 60 to 40 basis points after his arrival. He also reflected on the challenges of doing business in France, both as a lender and an owner, and vowed to stay away from that market. As for hedge funds and their poor performance over the past 36 months compared to the S&P 500, he believes this will inevitably have an effect on demand for luxury residential properties in New York.

Mr. Sternlicht’s opening remarks provided attendees a glimpse into his unique perspective on the interrelation of macroeconomic events and commercial real estate and set the stage for the panel discussions in the afternoon at the 8th Annual Columbia Business School Real Estate Symposium.

The 8th annual Real Estate Symposium, an exclusive alumni-only educational forum, took place on Tuesday, December 15, 2015 at the Columbia University Club of New York. Thomas J. Barrack, Jr., Founder and Executive Chairman of Colony Capital, delivered the closing address.

Eric Liang, CFA '17 is AVP of Careers for the Real Estate Association at Columbia Business School. He is a first year student pursuing opportunities in real estate investment. Prior to attending CBS, he was an Investment Associate in the Global Real Estate group of Aviva Investors. Prior to that, he was an Associate with RREEF Real Estate / Deutsche Bank. Eric is a 2009 graduate of the University of Maryland, College Park, where he was a finance and accounting major.

Andrew Kim ’16 is a VP of Alumni and Mentorship for the Real Estate Association. He is a second year student focused on real estate investment and spent his summer at the Related Companies in the New York Development group. Prior to Columbia Business School, Andrew worked in acquisitions and asset management at CIM Group, a real estate private equity firm based in Los Angeles. He earned a Bachelor of Arts in Architectural History and Theory from Columbia University.