Sternlicht: I Like Keeping Fear in the Market, I Like it Dropping 100 Points
In an interview with Bloomberg's Erik Schatzker and Stephanie Ruhle from the Milken Institute Conference in Los Angles, California, Starwood Capital Group LLC's Sternlicht said investors need discipline, "I like this tree shaking. I kind of like the market sort of reeling and dropping 100 points. I like keeping fear in the market. I like keeping people paying attention. Because it's good for discipline. It keeps them disciplined."
Sternlicht was asked why he and other investors get flack for being in the single family home market and said "It's a good thing we take heat because it kept everyone from doing it. And we waded our toes in. I thought it was a one-way trade. I didn't think we'd have any risk on the home values, especially where we bought. We focused on Florida and Texas and California. We stayed out of some of these wild markets like Phoenix and Vegas where now you're seeing property prices go down because the investors got so aggressive buying those markets beyond their natural price point."
Sternlicht also said:
- A lot of money in chasing property in Europe
- Search for yield is like it was in 2006
- We're in a period of 'long, slow growth'
- Hotel market in New York is softening
- Companies still holding back on travel spending
- Corporate group travel not what it used to be.
- There's a lot of supply in New York Hotels
- Property market is being drive by debt market
- 15% to 20% returns may be too much
- Investors should perhaps aim for 10% returns
- Stays out of 'wild markets' like Phoenix
- Managing houses must be shown to be efficient.
- Prices are down in aggressive investment markets.
- Likes Jeb Bush for '16, interested to see how Christie does post 'Bridgegate'.
Starwood's Sternlicht on Property Market, Hotels
On the current state of the economy:
"I think the world's kind of at this odd inflection point where is the economy - was it a winter-induced lull and then we're going to roar forward and the stock market will be fine or are we really in a period of long slow growth and don't worry about interest rates, don't worry about inflation. I think the long, slow growth actually I think propelled by waves of capital. There's a lot of money sloshing around again. It reminds me of 06. A lot of money everywhere. There's a lot of money chasing property in Europe today, in the US too. We have a lot of clients who want to buy core real estate in the United States and I think they're kind of throwing in the towel on caution. I think they basically decided that everything's better than bonds everywhere, and so property's a good place to move some money. And I think you're seeing it in the stock market too. You're seeing a lot of propped up valuations because there's just no place to put money."
On why it's not necessarily a good think to be moving into illiquid investments like property:
"I think property's fine. And I think the question is are we spoiled by trying to achieve 15 to 20 percent returns in a world the 10-year's 2.7. So maybe they're right. Maybe we should be aiming for 10s and that's fantastic with high yields are 5.5 percent yields, 10 percent returns. But we've traditionally sought higher returns, particularly in - it depends what market you're in, but some markets - they're all built differently. Obviously investing in small places is different than investing in London and New York."
On whether 2016 will feel like 2008 all over again:
"Well, I like this tree shaking. I kind of like the market sort of reeling and dropping 100 points. I like keeping fear in the market. I like keeping people paying attention. Because it's good for discipline. It keeps them disciplined. They remember the fear factor. One of the problems you have today for real estate is that you go back five years and you no longer pick up the '07 '08 crisis, right, so now everything looks good like this. But investment cycles don't work like that. They have big humpy humps like camels. They got humps. And I think we're going to - I think we're going to wind up - pay attention here... Big humpy humps. Notable quotables. But they do. They have - and they're driven - the property markets and all investment classes are driven by the debt markets, and the debt markets are the first place you probably lose your discipline. And I was just reading a report from Moody's on the CMBS world and how loan to values are creeping up and (inaudible) levels are going down. And you're not anywhere near the panic or the mess you had with completely free credit in '06, early '07. But you're certainly coming out of that."
On whether it makes him more inclined to sell than buy due to the amount of money 'sloshing around':
"Well, both. We just got to pick out - I think for sponsors like us at Starwood Capital, we've got to add value. We can't just buy a static asset and hold it. That's just going to give us a rate of return, whether it's a shopping center we want to retenant or relandscape or reimagine, add another floor or an office building where we can buy out tenants, we have to really add real estate value to earn our returns. But that's okay. That's fair. And then my job is to make sure we have the talent pool to do it. So I think - I think it's - it's kind of fun for me because you have to be smarter. Before it was pissing in the ocean, I like to say. It was like everything couldn't miss."
On how the hotel business is doing so well if things are going to be low and slow as far as the global economy is concerned:
"It's been a good Goldilocks period for real estate because there hasn't been a lot of new supply. So as demand entered back into the hotel space, companies have gotten much better pricing systems, much better at understanding their own inventory, and so they're able to raise prices faster. Occupancies went up first. Prices are going up now. It's spotty though. I'd say that the corporate group travel is nowhere near what it used to be and I think companies still are sitting on their pocketbooks. You see it in capital spending. You see it in travel, corporate travel, but the transient business has been pretty good. And places like New York are - are softening. There's definitely a lot of supply in the New York hotel space and the New York - New York hotel market is softening a little bit."
On what investors like him take so much heat for being in the single-family home market:
"It's a good thing we take heat because it kept everyone from doing it. And we waded our toes in. I thought it was a one-way trade. I didn't think we'd have any risk on the home values, especially where we bought. We focused on Florida and Texas and California. We stayed out of some of these wild markets like Phoenix and Vegas where now you're seeing property prices go down because the investors got so aggressive buying those markets beyond their natural price point."
"But I think people couldn't - didn't think you could actually manage this business in scale, and I think that's where investor skepticism came up because they really believed that this was a business that didn't need to be rolled up. It's a big business. There's more single-family homes rented in the United States than there are apartments in the United States. But it's been a mom and dad business. So our job will be to prove that it can be done efficiently in scale. And one thing that's better than apartments - the margins are about the game, 65 percent gross margins, appear to be where we are and where single and multi-family is. But the length of a lease is longer, so we get two years typically - a year or two years from a family. Apartments turn over much faster. So capital costs are higher, but - but adjusting for turnover, they are not... We're finding things to do, but it's gotten harder. You have to pick your markets, and certain markets you're shut out of. You can't make the metrics work right now. They've run too far too fast. "
On 2016 GOP presidential candidate:
"I like Jeb Bush. I'm interested to see how Christie pulls through his toll gate or whatever gate this is, bridgegate."