Sternlicht: Worries Aside, CRE is Investors’ ‘Sweet Spot’

NEW YORK CITY-“There’s a lot to worry about,” Barry Sternlicht said Friday morning in the course of a Q&A with Bloomberg TV’s Carol Massar. The chairman and CEO of Starwood Capital Group peppered the discussion with examples of what has him feeling uneasy, ranging from the euro zone crisis to the potential for a near-term oversupply in the Manhattan hotel market to the long-term and long-deferred consequences of Uncle Sam putting everything on the credit card. Yet with it all, Sternlicht said commercial real estate, at least the domestic variety, is “a sweet spot” as far as investors are concerned.

That’s especially true for overseas investors, he pointed out, and particularly when they consider the alternatives for parking their money. “A 4% yield looks funny to us historically,” Sternlicht told the audience at the second annual Global Real Estate Markets Conference, held at the New York Stock Exchange and sponsored by the James A. Graaskamp Center for Real Estate at the Wisconsin School of Business. “But when they look at treasuries with a 1.7% yield, it’s not bad.”

In terms of market fundamentals, Sternlicht noted that although “the average Joe” is feeling more confident than business leaders at present, this could create a “self-fulfilling prophecy.” If the housing market continues improving, he said, it will lower the unemployment rate on account of construction jobs coming back. Yet he expressed unease with the pace of the housing recovery in some regions; markets such as Florida are coming back “a little faster than I’d like.”

Such speed has Sternlicht concerned about a loss of investor discipline. “I don’t want the markets to be too healthy,” he said. “I want people to have some fear.”

Even so, Sternlicht doesn’t see today’s investment market generating the frothiness we experienced in 2007. He cited three essential differences between today and five or six years ago: in 2012, we’re seeing positive leverage; properties are selling for well below replacement costs; and generally speaking, there isn’t the problem of oversupply.

Massar, chief national correspondent for Bloomberg TV, rounded out the conversation by asking Sternlicht what’s on the horizon for Starwood Capital. Without getting into specifics, he hinted at the company doing “a couple more things in the public markets,” and said he’d like to diversify the platform further into “other areas that would make sense for investors.”