Barry Sternlicht speaks at the 2014 Milken Institute Global Conference in Beverly Hills
Thomson Reuters
The economy is in trouble due to the Fed’s aggressive monetary tightening, according to Barry Sternlicht.
The billionaire Starwood CEO predicted a coming recession and “Category 5 hurricane” in the real estate sector.
His view is less upbeat than the predictions of a soft landing that have been growing in recent weeks.
A storm is headed for the real estate sector, and a recession is coming despite growing talk of a soft landing, according to real estate billionaire Barry Sternlicht.
The Starwood Capital CEO sounded off the Federal Reserve’s aggressive monetary tightening in an interview with Bloomberg Wealth this week. Central bankers have raised interest rates 525 basis-points to tame inflation, and the fallout from that aggressive pace of tightening is about to hit the economy, he warned.
Higher rates and tighter financial conditions spell trouble for the real estate sector in particular. There’s around $1.5 trillion of commercial real estate debt that’s set to mature over the next three years, which could lead to a wave of defaults as rates stay high and property valuations come down.
“I like to say there’s a hurricane over real estate right now. We’re in a Category 5 hurricane, and it’s sort of a blackout hovering over the entire industry until we get some relief or some understanding of what the Fed’s going to do over the longer term,” Sternlicht said in an interview with David Rubenstein.
In Sternlicht’s view, a recession is also on the way despite renewed hopes that the Fed can steer the economy away from a downturn.
“There is going to be a serious credit contraction. The country in any asset class has not adjusted to that cost of capital yet. But it’s coming. The economy will slow,” Sternlicht said.
That’s already visible in waning optimism throughout the economy. The CEO confidence measure ticked lower to 42 in the second quarter. The Consumer Confidence Index rose to 110 in July, but that reading is still lower than pre-pandemic levels of around 130, according to Conference Board data.
Though unemployment remains low, that’s largely due to Biden’s $1 trillion infrastructure bill, as well as the services side of the economy still running hot, Sternlicht said.
“It feels like the last gasp before we settle into what should be, what you’d expect to be – I hope it’s a shallow – recession,” he added.
Other Wall Street commentators have been more upbeat recently. Markets are widely expecting Wednesday’s rate hike to be the Fed’s last of the year, boosting odds that tight financial conditions won’t push the economy into recession. While labor markets are hot still, inflation is steadily cooling, leading to talk of a Goldilocks scenario in which the Fed can lower inflation without crushing demand or crimping growth.