Candid and clear-eyed: Starwood CEO Barry Sternlicht on the state of the stock market, commercial real estate, and e-commerce

In our latest Walker Webcast, we provide a peek into the mind of real estate mogul and Starwood Capital CEO Barry Sternlicht. Known for his keen eye for investment, political acumen, and uncanny foresight, Barry spoke with Walker & Dunlop's CEO Willy Walker about:

  • The baffling state of the stock market
  • The (continued) need for widespread testing
  • The retail industry and the troubling realities of e-commerce
  • The future of hospitality 
  • ...and more!

Walker Webcast

Follow us on YouTube for the latest webcast and videos. If you have any comments or questions about the evolving economic landscape and how it is impacting the CRE space, our experts are available and fully operational to help. Additionally, if you have topics you would like covered during one of our future webcasts, we would be happy to take your suggestions.

A bit about each speaker:

Willy Walker
Willy Walker

Willy Walker is chairman and chief executive officer of Walker & Dunlop. Under Mr. Walker’s leadership, Walker & Dunlop has grown from a small, family-owned business to become one of the largest commercial real estate finance companies in the United States. Walker & Dunlop is listed on the New York Stock Exchange and in its first seven years as a public company has seen its shares appreciate 547%.

Barry Sternlicht
Barry Sternlicht

Barry Sternlicht is Chairman & CEO of Starwood Capital Group, the private alternative investment firm he formed in 1991 focused on global real estate, hotel management, oil and gas, and energy infrastructure. Mr. Sternlicht also serves as Chairman of Starwood Property Trust (NYSE: STWD), the largest commercial mortgage REIT in the U.S.; and French crystal maker Baccarat S.A.; as well as member of the Board of Directors of Invitation Homes (NYSE: INVH) the largest publicly traded investor, owner and operator of single-family homes in the U.S.

If you have any comments or questions about the evolving economic landscape and how it is impacting the CRE space, our experts are available and fully operational to help. Additionally, if you have topics you would like covered during one of our future webcasts, we would be happy to take your suggestions.

Webcast Transcript

WW: Thank you, Susan, and welcome to another Walker Webcast. If it's Wednesday, it's the Walker Webcast. My guest today is Barry Sternlicht, Founder, Chairman and CEO of Starwood Capital Group.

Barry joined me on the Walker Webcast back in April at the onset of the pandemic and to date that discussion with Barry is the most watched Walker Webcast with over 25,000 views both live and on replay on YouTube. Barry actually thinks that his mother and my mother account for about 24,000 of those views, but I'll take it.

I went back and watched that discussion with Barry in preparation for today and as you'll hear in a moment, Barry's predictions on how the pandemic would unfold were extremely accurate and insightful. I am hopeful he'll give us the playbook for the next six months today. This is our 26th Walker Webcast and between live interviews every Wednesday and replays on YouTube, we're close to eclipsing 175,000 viewers. I’ve received countless numbers of emails, letters and phone calls thanking us for the Walker Webcast and expressing people's hope that we will continue doing them after the pandemic has passed.

First, I want to thank all of my previous guests and Barry for coming back on, for their time and incredible insights over the last 26 weeks. These have been extraordinary times and extremely challenging times for our nation and our world and I'm deeply thankful that these webcasts have been able to provide our listeners with insights and thoughts on the pandemic, our economy, racial justice, education, health, sport, politics, and quite simply our new lives.

Second, our marketing team at W&D has done a fantastic job of taking what started as another Zoom call and turning it into a weekly production that is as good as any webcast out there. And finally, with regard to how long we keep doing this, we’ll keep doing them for as long as amazing guests like Barry will keep giving us an hour of their time.

A couple quick notes from W&D’s perspective before I turn over to my conversation with Barry. Debt markets continue to transact, particularly in the multifamily space. We just financed the acquisition of a multifamily property for Starwood in Atlanta. That was a $53 million fixed rate loan, full-term IO, at a 2.24 interest rate. I've been told that's the lowest coupon rate Starwood has ever gotten on any asset anywhere in the world. We also just financed a mixed-use construction loan in an opportunity zone in Indianapolis. That was a 229-unit multifamily construction loan with about 19,000 square feet of office and retail space. It's a 55 percent loan to cost, at a 5.25 interest rate. We added a Mezz piece on top of that to take the leverage up to 72 percent and the Mezz was priced at 13.25 percent.

There is capital for non-multi assets but not at a 2.24 interest rate. Most of the CMBS shops are up and running and while they won't quote hospitality assets yet, they will get to about 70 percent LTV with pricing between 3.50 and 4 percent for multi, industrial and office. They will look at strong retail, but it needs to be grocery anchored or a strong single tenant like a Walgreens. Spreads on CMBS are nearly back to pre-COVID pricing at swaps plus 100 on the triple A's, which is down from swaps plus 350 when Barry and I last spoke in April, so spreads have come in significantly and there's a lot of capital looking for deals through CMBS.

On the life side of things, we just financed a suburban office building with a life company in Southern California, $31 million deal at a 325 coupon but it was a 55 percent LTV very high net worth owner and the building is leased to the State of California for the next nine years. So while there is attractively priced capital for non multi assets, they need to have a unique story and fundamentals. From a credit and portfolio performance standpoint W&D’s $100 billion-dollar servicing portfolio continues to perform exceptionally well. Many of the loans that sought forbearance early in the pandemic have come out of forbearance and are current. And asset classes such as student housing and seniors housing where we had some significant concerns early on continue to perform very well.

We approved one forbearance request on a Fannie Mae loan in early August and three forbearance requests on Freddie Mac loans in early September; so over the last 45 days we've had four forbearance requests on a portfolio with over 4,200 GSE loans. And as I mentioned last week, while the National Multifamily Housing Council rent tracker, on the 11 million apartment homes that they collect data on, was down almost 5 percent in the first five days of September from the previous mark, for the first 13 days of the month collections are up to 86.2 percent, only 70 basis points below the August collection number for the first 13 days of the month and off 2.4 percent from September of 2019.

I heard yesterday that Speaker Pelosi wants to hold Congress in session until another relief Bill is passed, but communication between the Speaker and the White House is not active enough to really have any confidence right now that any kind of compromise can be reached. Okay, to turn to Barry. First, welcome. Second, thank you very much for joining me again. And third, as I mentioned at the top I went back and watched our last discussion and man oh man did you get a lot of things right. You predicted we'd have a vaccine by Q1 or Q2 of 2021 and that timeline seems to still be holding. You said that if we had a second wave, which we got this summer, that we wouldn't shut back down, which we didn't. You outlined performance across various CRE asset classes that have pretty much held for the last five months, and you predicted that we'd even have an NFL season which we saw start up last week. So congratulations on all that.

BS:  I’m surprised you didn’t ask me about the fans.

WW: Yeah, exactly, you didn't say without fans. So in that conversation you made two comments Barry that I wanted to start off on. First, you said that the credit guys generally are smarter than the equity guys so which is a better indicator of where we are and what comes next year. A 28,000 Dow or a 68 basis point 10 year? And then secondly, you said that with all the liquidity that has been pumped into the global economy by governments that this is a whole new ballgame and you accurately predicted a lot. Is this game playing out as you expected with regard to low rates and absent value inflation?

BS: Thanks for the softball, it’s a good question. I was thinking it was interesting to see the major colleges go back and play and reinstate their seasons today so that's really good for those small towns that have hotels in them, I’ll tell you that, I know one friend of mine is going to be really happy about their announcement.

Well I was really talking about equity guys in real estate against debt guys in real estate, I wasn’t really talking about equity market against the 10 year. But there's no question that the market - there's one benefit from getting old and experienced is we all lived through 2000-2001, and as you may know I raised this fact. So even in my spare time looking at opportunities to deploy that and the valuations of these companies is, I don't even know how to describe it. I mean, there's a very famous quote people should go back and find from Larry Ellison about how absurd it is to value a company at ten times revenue and there are companies that are 100 times revenue today and they can't really grow into those multiples. 

So I think the equity markets, I think what's more powerful than anything else is liquidity that's important to the market, it's actually driving all kinds of strange things, strange behavior, including stocks up. These aren’t startups like Microsoft or Amazon or Google Drive going up 50 or down 100, Tesla's market cap swinging 25 percent in a week. $100 billion swing in a market cap, I mean these aren't, there used to be small cap stocks that could move like this, these are giant companies moving like that. It is a very strange collection of forces whether it's the Robin Hood crowd, computer trading, momentum trading. It usually doesn't end well. You know people, taxi drivers, my housekeeper, they’re day trading, they're buying futures and options, they’ve got a lot of time on their hands, everyone's working from home and pretending like they're in the office, and apparently they’ve all found new jobs trading.

So in 2000-2001 when I was running Starwood Hotels and we were making $1,000,000,006. I sat next to a woman whose company was worth more than mine and she had $4 million in revenue and I said you’ve got to buy me and she said no that would screw us up, we're asset light, and in six months her company was out of business, she was gone. I said just buy me and put me out of my misery. It was so bad back then, I did a panel with a bunch of tech guys the joke was it used to be people would call in sick, now they call in rich because the stocks are going up so much. And can you imagine the wealth that’s been created, the Snowflake IPO today, it's just on my screen. I think it's probably a great company, it’s the valuations that are not right. I just got off the phone with a pension plan, an offshore pension plan from South America and I was saying this doesn't, real estate is really a safe harbor to some extent. And it's very hard not to want to play in tech stocks, I mean the momentum of these stocks and the action, it’s almost like a drug. I have exposure to some extent through some of these companies, but the valuations are just mind boggling. In the stock world I try to come at it and say okay you're not losing money today but are you going to look like in five years. Okay I'll make $200 million and then you think okay you lose money today and you'll make $200 million so how do you value that? Let's say $200 million twenty times, $4 billion, and they want $10 billion for the company today. So they're assuming that on their numbers it'll be 40 times EBITDA in five years, so this just doesn't feel like it's going to end well. And I just hope that there won't be a lot of fallout from that and I don't think so because the real estate stocks are barely catching a bid and I do think as you've seen a few times that as soon as there's some demonstration that we will get this vaccine that there'll be a catch up of what I’ll call the old world stocks, including real estate will get a bid.  

And then we're going to have to see for like hotels how fast flights are reinstated and how fast they hire people and what the coverage will be, whether they’ve pulled out of cities permanently or not, I mean the airlines seem to be muddling along, obviously they’ve cut flights but I don't think they’ve permanently furloughed all their people. And for travel, for cities, for New York City restoring domestic international travel is pretty important and that may take some time depending on when we get this vaccine and how good it is, it may take until the middle of next year. I was thinking, I was hoping more like the first quarter or even January but I think it's going to take a little time because the booking cycle’s not immediate, they won't be able to, corporations aren't going to - actually we booked our first group in our hotels in I think six months, they actually are staying there in the New York City hotel today. I think it's 50 rooms and I think we're making $3.50 but at least we have a group, it's 30 people.

WW: Barry the last time we spoke you obviously owned fixed assets and Starwood’s investment in commercial real estate, you can't just sort of change your position very quickly there, but last time we spoke you also said that you had a higher cash position in your family office than you'd ever had previously and that you kind of got into that position four to five months before the pandemic. So given your thoughts on the market are you shorting equities today with your own capital?

BS: Can I take a pass on that?

WW: You don't have to tell me which ones, I'm just curious.

BS: I have shorted a few things.

WW: You have, okay, that's fine, that's as good as a response as I could ever hope for.

BS: I still have the cash though. I think there will be really good opportunities to deploy capital when this frenzy slows down. It's interesting, I mean if you think about the market what it's thinking about, I would have thought and I would have gotten this wrong, that we would have a second stimulus package that would be a trillion and a half, a trillion or 2 trillion, something would pass and I think there's some people who don't think that's going to happen. I think the equity markets assumed that something would happen, and I think we're going to see a really interesting period if Biden wins. You'll have what, it’s not clear how many weeks you'll have left in the year after they pick a winner, it depends on what happens with these mail-in ballots. But assuming if Biden wins - I don't think the equity markets are convinced that Biden's going to win. I don't think this is forecasting an increase in corporate tax rates, capital gains tax rates and taxes on people making over whatever number they choose, $250,000, $400,000 a year, I don't think that's in the market.

I think people are underestimating the Democrat’s conviction of changing the tax code rapidly. I heard somebody say yesterday to me, an executive, that won't happen until 2022. That's dead wrong because it will happen only when for sure they have control of the three houses and 2022 is going into an election year, I don't think they'll wait. I mean I think this is the agenda they're running on, they're very vocal about it, I don't see any pull to the middle, and I think the capital gains tax rate exchange is probably the most difficult for the equity markets and private companies to digest. And obviously some of the states like California are jumping ahead of all that, they're talking about a wealth taxes in California, and so you know people are leaving already, they’re not even waiting for the election.

WW: To your point about the equity markets holding up, when we last spoke which was over five months ago, you said look they've gotten the stimulus bill done, the real question in my mind is how long does the pandemic last for and do they screw it up once this original stimulus runs out. And so here we are in that moment where it very much appears as if they're screwing it up right now, yet the markets haven't gotten the memo, if you will, that they are screwing it up. So to your point about a deal or not, how fundamental do you think it is that we get something between now and the election?

BS: The deal I'd like to see is something like 70 percent of the former jobs covered on unemployment benefits, 70-80 percent. That was actually the Republican Bill and Democrats thought it wasn't enough. I can tell you definitively they’re wrong about this point because we can't hire people because they make too much money with the $600 add-on they gave to the original unemployment benefits. I think the calculation was like 75-80 percent of people are making more money on unemployment than they were in their jobs and those are the people that need to get back to work and right now with no support I'm afraid that's not good for the country. So I think they need, the at-risk service workers that we can't hire at our hotels and we can't hire at restaurants because they’ve closed the restaurant or they're not in the stadium or they're not in the ballpark or they're not wherever they are, those are the people most in need, they probably could use a stimulus, an aid package.

And I think that's the most important thing we need to cover. Everything else, the economy is booming along, it is doing much better than people think. Small businesses could probably use loans. The PPP I think looks good, there were some problems with it but overall it was good. And I think they could use, I think it's so dangerous to get addicted to debt financing, I mean individuals can’t just borrow money from banks forever. And the federal government is completely enraptured with the fact that they can buy money, borrow money or spend money and there's no consequences in the capital markets. Until there is right, until something happens. And that's one of the things Willy that worries me the most about 2021, because there's no question we've moved the world to a deglobalization. National pride, nationalization across the globe is going up. We don't know who the President is going to be but having a significant spout with China is really difficult because China is the one, the biggest addressable market for many companies and the emergence of their hundred, you do things in orders of tens of millions in China, you know 300 million people in the middle class going up to 400 million, 500 million, it is the growth market of the world and shutting it down would have great implications for the multiples of stocks in the S&P 500 so you know I think that's really important and also capital flows, you know will capital flow into the U.S. from China, will it stagnate, will they trap capital in China and they can't get it out.

So I think there's a lot at stake and then you have the risk of higher rates which, you know, we've been wrong basically for three years, they keep going up no matter what. When we have a surplus, they went up and when we’re in a deficit they've gone down. I didn't go to that class at business school, I must have missed it, so I don't understand. People talk about Trump's economy, Trump's economy was driven by debt, we never saw spending like that and I think deregulating things like the EPA or eliminating the Endangered Species Act or the Clean Water Act, that's just ridiculous, that's not helping the economy, that's not critical to the economy.  

I think the corporate tax cut probably on the margin too much but in direction made American companies more competitive. And I do think fixing the China, like TikTok, he's a hundred percent right, I mean it's like we can't compete, Netflix can't be in China, Google can't be in China, Amazon isn't in China, why should TikTok be in the US? I think he’s right about that. If they open their markets, we’ll open our markets. China didn’t steal our jobs, we just exported to cheaper labor markets so we could get stuff at Walmart really cheap but what we didn't do is open the markets to our companies, whether it's our banks, insurance companies or any of our industrials so it was never a level playing field. He was right about that too. And even today, it's currency. They play this game in the world market with a fixed currency and no major economy has a fixed currency so if they were so strong right now their currency would be rising and their imports would be more expensive and that would aid U.S. manufacturing against theirs but that isn't the way it works. And it's a shame that we're not talking about the things that really are driving us to become more of an animal fight, what do they call those things with hens going at each other, a cockfight.

WW: One of the other comments you made last time we were together was the slope of the recovery. You'd come out in March and said V shaped recovery and then when we spoke in April you're like not sure it's going to be V, but we could bounce back pretty strong. But one of the things you mentioned was the establishment of protocols, of establishing how people can interact and engage was super important and that depending on if you got nationwide sort of protocols on how people would reengage you could sort of steepen the curve of coming back and I thought at that time that was really prescient. And then as we've seen, we've gone through the summer, it's been sort of this hodgepodge of sort of 50 individual states all sort of doing their own thing. What's your take on that sort of, if you will, prediction on your part of its really dependent on sort of standardization on protocols as it relates to fighting the virus and the fact that it has kind of been done in this patchwork manner. Anything now that you can look at that would say that if we could do this between now and the end of the year that we're going to get an acceleration of that curve?  

BS: Well I'm sure everyone on the call has tried to get tested at some point. I went overseas and had to have a test that was valid within 48 hours of getting over there and it's inexplicable how difficult it is to get tested and the tests are available and the fact that we can't like have them in every office building, when you come in you could have a test. I think that would restore all kinds of confidence and people would come back to work. We are in our New York office and I think we have almost, we don't have, this isn't a very dense office so we could bring almost everyone back. I think it's like, so almost everyone is here, people in New York want to get out of their apartments if my little demonstration here is realistic. In Connecticut where Willy we still have a headquarters about a third of the people don't want to come back and I asked them to come back, other than hardship cases, and I'd say they're not comfortable. I mean I think if you go out shopping, you go to a restaurant, you eat outside, you go to Walmart, you walk around, you stand at tellers, I mean you're coming into more contact with people than you will in the office frankly and at least you know the people in the office. And if there's a health issue, a serious at-risk issue, a hundred percent please stay at home, we want you to stay home.

But I think if we had testing there would be almost no excuse for people not to come into the office and I can’t understand why we can't get that. It seems like the Europeans, the Koreans, the Chinese, in Hong Kong there been no deaths at all, zero deaths, so there are better things going on than what we're doing. And this thing is so disorganized here, by state, by city. I mean, as you know, until Governor Cuomo ordered the Bellagio to open their restaurants in New York he was going to keep them closed until January, I mean that's just unbelievable and ask the restaurants to survive how? How are they going to pay rent and what impact does that have on property value, and what impact does it have on landlords and then property taxes and his answer is go ask the government for money. I mean that's just the most preposterous thing I've ever heard. One of the key issues in his stimulus package is bailing out what's perceived as the profligacy of the unions in these blue cities that are that are destroying jobs in their cities they’re trying to protect.  

The hotels are, honestly, they're all union workers and I can't bring them back, it's just crazy, it's just a ridiculous position. He’s going to put guards on the bridges to take people's temperatures while they come into New York, is he trying to empty New York of everything and everybody? I’ve been very vocal about, I cannot understand the agenda, but it's so bad, he’s single-handedly responsible for probably a 20 percent decline in values of property in New York City and sadly he has another whatever it is, a year to go. So I just hope there’s a New York City left to rescue when he's out of office and I hope the voters organize themselves with picking somebody who has some semblance of sanity. And this is public so I'm willing to say it and he can go ahead and arrest me I’m sure.

WW: You said 20 percent decrease in value Barry across all asset classes hitting New York offices harder than retail, harder than hospitality. I mean I heard you predicted a third of hotels in New York will go bankrupt.  

BS: It’s going to be more like 35, maybe 40 in all asset classes and some worse, much worse than that. You know I think retail rents on Fifth Avenue are probably down 50 percent. You all can see the city, there's empty stores everywhere. It's not all de Blasio, I mean we should talk a little bit about Amazon, but it's really hard for retailers to pay their rents on Madison Avenue when their stocks are trading at $1 a share so it’s the end of the game for all physical retail. The one industry or part of retail that has been spared was luxury, you know, Prada, Gucci, LVMH’s brand. They're not on Amazon and Amazon announced a luxury channel just I think this week and we'll see what that looks like. But to date luxury companies, even Estee Lauder, is not on Amazon and they have their own brand sites and I think Jeff who obviously wants to be worth more than $220 billion, has decided to take down the rest of retail.

I think, and you can correct me if I'm wrong, you would probably know this, I think the prime account was $75 when they first introduced it and I think now it's like $125. And when there's no physical retail left it'll be $20,000 to be on Amazon and it'll be the only way to get any goods. So, I mean you're creating a monopoly right before your eyes, a monopoly the scale of which the world has never seen. I actually went online to buy a wastebasket today for my apartment and the first 30 listings are from Amazon. I can't find anybody but Amazon that can deliver me a black leather wastebasket. And I just think, I mean Americans used to get upset about the bookstore going dark and now everything's going dark and you can't compete with this company and it needs to be split, the cloud service has to be split away from the retail and they can't subsidize the money losing operations of the retail because mom and dad cannot deliver to me a roll of toilet paper for free in two hours and as long as they allow this to happen, its proprietary pricing and that should not happen. I don't care about consumer convenience, that's just not a level playing field. It's great for consumers to buy steel at 10 cents on the dollar when the Chinese dump it and we stopped it. But Amazon can destroy all of retail in America, mom and dad, every store, and people say it's convenient. My children, I have boxes to the ceiling from Amazon, they don't even know what a store looks like. So I think we're going to regret that and it's obviously too late, and I probably won't be invited to his birthday party, but you know this is a really bad thing that's happening to the U.S. The Europeans are doing a much better job protecting their small businesses than the United States, so we'll see how that goes, ends up. 

WW: You saw FedEx’s earnings yesterday, I mean just off the charts, and all tied into exactly what you're talking about. Let's talk about retail for two seconds. You guys just gave back a portfolio of malls that you bought seven years ago and if you think about the retail landscape, as I walk around malls here in Colorado. I was out at the Cherry Creek mall last weekend and you walk into Macy's and Neiman Marcus and you can throw a rock and you won't hit anybody, but then you walk out and you see lines in front of stores like lululemon, stores like Peloton. Talk for a moment about those retailers that are going to win, the Warby Parker’s of the world. I mean you're big on brand and the fact that this whole reshuffling has forced certain companies to have that dual online and bricks and mortar strategy. We're now six months since you made those comments. It continues to play out the same way? Or do you think that just the headwinds of people getting out and walking through a mall makes it so even if you're a lululemon or a Peloton you still are, you know, focusing all your efforts on online and kind of abandoning your retail strategy? 

BS: Well let's talk about, like hotels everyone's having to - in hotels resorts are doing pretty well, drive-to resorts are doing really well, extend stay hotels are doing reasonably pretty well. Big urban boxes that have big meeting spaces and banquets, they're not doing well and many of them are closed, and in unions cities you can't even begin to open them and the question is how much money can you lose before you give it back to the lender.

So in retail, we started out as the most over retailed country in the world and then like 10 times the retail space per capita of other countries and then we introduced Amazon and all of a sudden whatever we thought we were over retailed we became seriously over retailed. There are 1000, 1100 malls and we’ll probably wind up with 450, 300, something like that, the ones that really serve a purpose and have become real parts of the community. The problem is the scale of the mall. How many tenants are there like Warby Parker or lululemon? William Sonoma has actually done a great job, their online. I made the mistake of buying something at West Elm or William Sonoma, I forgot, but I get an email I think three times a day from them and inducing me, you know whatever I looked at is half off 40 minutes after I looked at it. So I think some of these guys are doing a great job, but because the incremental spend doesn't go to expansion, it doesn't go to renovating their existing store it goes to the online strategy, you know they're not looking for massive store expansion.

Now Warby Parker is an exception although I think they've ceased that. I think other companies that I know that had big expansion in physical are not going physical and where will they go? Will they go to a mall where 30 percent of the stores are empty or dying or will they go to a high street location where it's sort of just a marketing spend? I believe in physical retail, it's not going away, also outlet centers which are basically like a field trip, right, you go to discover what you could buy for 35 cents. Those are doing well. I mean if you look at Simon's numbers the outlet centers are doing quite well. People have lots of time, they’re apparently working from the outlet centers, so the outlets are doing great. The major malls, I mean they are struggling, they're getting some foot traffic.  

Now Amazon announced today a small format, you'll be able to pick up your Amazon boxes at the mall or a distribution outlet. And every time I hear that Amazon's hiring I want to kill somebody because they should put that hiring against all the guys that have been fired because they’ve put all of these companies out of business so they're switching from customer facing jobs to some warehouse where they're stacking boxes and putting in the little box in their truck and sending it to you and delivering it. So yeah, great job. I mean it's not net hiring its net losses in the retail industry and they shouldn't get credit for that. But by the way it's an incredible product. I had to work hard to find somebody that wasn't using Amazon to send me wastebasket today.

WW:  Did you find one?  

BS: Let me talk about malls for a second. Without financing, and we have all these arguments, without financing cap rates in malls, the mezzanine started to be 7, 8, 9, 10, 11, 12 percent and as cap rates began to reflect the uncertainty of the cash flows the financing markets, again I think the credit guys were ahead of the equity guys because GGP was sold to Brookfield right in the middle of the earthquake in retail at a cap rate that I think reflected yesterday's pricing and then they took out Forest City which had a huge retail footprint. And we didn't do it, we looked at it, we didn’t do it. So I think as cap rates moved if you had malls 65 percent leveraged and you take a 7 to a 9 or a 6 to an 8 you're getting seriously squished. 

And now trying to underwrite a mall. Well you don't know how the company is going to do. You know the tenant has all the operating leverage now and the pandemic only made it all worse because they stopped paying you. Even credits stopped paying you, you had to threaten to sue them to get them to pay their lease. You had to be closed for a while anyway and that was often government ordered. And then you had the anchor uncertainty and, as you know, if you lose many malls which were written for, the agreements that govern malls including the reciprocal easement agreements, the operating agreements around anchors, were written for institutions 30 to 40 years ago because the anchor was the draw and the anchor is not only no longer the draw but they were going bankrupt and they were your competitor. They weren't a draw. And what Simon did in buying JC Penny and what General Growth did in teaming up was they had to compete with these empty stores so they're charging 50 bucks in the mall and Penny’s basis is almost nothing, $5 million in the store, they could sign leases at $10 a foot or $15 a foot. So they had to control their own competitor that was sitting right next to their mall with outside access, you don’t have to walk into the mall, and they were being cut up by Seritage into, you know in the form of Sears, they were being cut up into multiple stores, so they competed with your rents in the mall so they had to take it out and I think it was really smart trade for both of them. I mean they're in the business so they have to protect themselves and now they can choose their own destiny, they can figure out pricing, that was a way to control pricing at their properties and I thought it was a very obvious and smart move. I didn't understand why Amazon didn't buy them and they were rumored to have been buying them because that gives them in-city distribution in I think it was 850 locations so maybe they'll do it later, but Amazon has nothing but cash and I would have assumed they would have done that at this point, maybe they’re waiting for some other retail chain anchor to die.

So anyway if you have these REA’s, if you lose a JC Penney and you know we couldn't predict what would happen with the bankruptcy and we couldn't predict even today which stores will be open and which weren't, we as fiduciaries, you can fix a mall, it takes a lot of money. If all these tenants are leaving you have to put in new TI packages for all these new tenants, you have to move them around, you can't move them around easily because you’re starting with a quilt with pieces in place. You want to place a Warby Parker line with Bonobos in a way and Parachute and all the hot brands on retail. You had to create an alley for them, the didn’t want to go in between Mrs. Fields cookies and Ann Taylor Loft, so you'd had to clear out a space. It's unbelievably expensive. But if you don't know what the cap rate is and you don’t know what the financing markets are, we found it challenging to tell our investors that we should invest more capital in this and we have funds that can do anything, right. Fortunately for us most of our retail investments were done in co-invest partnerships. I mean we're very unhappy about what happened but COVID, I mean we were fighting like heck, but then COVID knocked the wind out of the remaining sails for us. And, again, our clients aren't very interested, just like the bank isn’t interested in lending against the retail center. As you pointed out the clients aren't interested in investing equity when we can't really tell them what the outcome is. I would have if I were some of my clients. One of our malls went from $11 to $15 million in cash flow over four years and I would have paid down the debt and just milked the cash flow because it's almost $600 a foot without an Apple store. One of the things you probably don't know about Apple; Apple figured out they were the anchor. So in the malls they were in instead of them paying you $55 rent and signing a long term lease, they said well you have to pay us $8 million to stay and we want to pay you nothing just like the anchors used to pay you nothing. So all of a sudden that became, and if you lost the Apple store you lost $200 a foot.

So again, it's capital, it's money, you have to put in to protect an asset that you can't be sure what the yield is, what the value is. So this changed so fast, we made a mistake, we did not expect the pace of the collapse to be as fast as it was and in cities like Lincoln, Nebraska where you’re the only mall in town, we thought that the community would support the mall longer if we brought in activities and made it fun and interesting and it didn’t work. Even if I had a good Abercrombie store, if the other 300 aren't working when they went bust, my store was going with it and they'd reset my rent. So it became super challenging and at the time when we bought them, buying the first portfolio at an 8 cap when apartments are trading at 4’s, look at Westfield, we thought we did a great deal, they stayed in for 10 percent of it.  And also if you finance it, one other thing, if you finance across, in order to get debt you had to cross the malls, if you had three good malls and one crappy mall, you had to save the crappy mall. So the cross financing worked out poorly for the equity aspect, I mean equity and the debt because it kept you from investing in the good malls because you couldn't fix the bad mall and if you did you're just working for the debt not for the equity. So it's super complicated.

WW: Let's move from a troubled asset class to a bright spot both for you as well as for the overall commercial real estate space.

BS: I can’t wait to hear what it is.

WW: Exactly. So let's go to housing for a second because you were early into single family rental. You and I had lots of conversations back in 2012 to 2013 about why one would either get into that space or not get into that space and you clearly made the decision to get into it and have benefited tremendously from it.

I had Ivy Zelman on the webcast two weeks ago and Ivy was putting forth a very compelling sort of analysis of not only the single family space but single family rental versus multi and sort of this urban exit and people moving out of the cities and into suburban single family homes and into single family rental.

Give me your take on what you're thinking about as it relates to investing in those three housing products - single family, single family rental or multi - and how you see the market evolving over the next year or two.

BS: If you worry about technology affecting office or video technology affecting travel, but you don't worry about technology affecting residential. I mean people can’t sleep in their computer and so the complex is probably, I would think the best place to be in real estate period right now and in all those asset classes because even though they'll be short term, probably declines in NOI in multis in most cities as costs rise and it's harder to get rent increases, I think cap rates will probably drift south and so I think you'll be fine in multis and single family has clearly been a bright spot.

I was obviously was on the board of Invitation Homes until May and now I'm an observer, I guess they call me. You know the strength of the market you've seen it repeated in the public company earnings, the growth, they were getting growth right through the pandemic, they were getting 3, 4 percent same store sales growth and multi’s were decelerating. Multi’s took a different view that was interesting as an industry and our guys talked to 40 companies in the industry. They said, hey, during the pandemic let's just keep people in their homes, let's not raise rents. The single family guys, they didn't do that, they kept raising rents so they have a higher bad debt ratio I guess than multis but it's not that material at the end and they got even fuller, probably benefiting from not really the exodus from cities, I think they were benefiting from the strong housing market in general which people, you know with those interest rates at 30 years ticking below 3 percent people went hog wild.

And that's kind of one of the things, I may have got some things right but I would never have predicted that with who knows what the real unemployment was in the United States, but I would never have predicted the scale of the boom in single family homes, and the pricing power and the bidding auctions. And, yes, the comeback of Greenwich, Connecticut and New Canaan and suburban New Jersey and the Hamptons is 100 percent COVID related, that’s all COVID. But I think people reassessed their need to be in the cities and again safety, you know if parents are worried about their children walking to or from school or going out at night they're going to leave the cities and they are leaving the cities and they're leaving in some scale and you can look at the moving data and it proves it, it's not hearsay, it’s just a fact. And there's big movements out of these blue states and the governments are further left. I'm told that behind de Blasio is a further left city council than he is. It's almost hard to imagine what that would be, other than confiscating people's properties. And in California, I mean California is doing everything they can like de Blasio to kick everyone who has money out of the state. And it's been inviable. People have said it's an incredibly wonderful place to live and you save all that money on snow removal and your car rusting. But I know a couple of VC’s that have left the state, they just moved to Austin, you get that note, leaving San Francisco, it's been wonderful, bye friends I've left to go to Texas or they're moving to Florida or they're moving to Nashville. I have friends in Chicago, they just picked up their whole firm and 80 people and moved to Nashville from Chicago. So this movement is going to accelerate and I think this complex is actually an excellent place to invest so we have been buying once again single family homes and I think Blackstone just did a preferred in another company in the space. So it is an area that’s granular, it's a lot of work, but we have a lot of capital to deploy and we think the risk-reward is attractive in that area.

WW: It sounds like you're saying generally speaking housing a great place to be. If you had to rank order, if you had to make either entry level single family for sale, single family rental or multi, of that kind of lineup where are you most interested right now, single family for sale, single family rental or multi?  

BS: There's a company called LGIH, it was a public company and I looked at buying it, it was like in the 30’s and the quality of their locations was far out of the towns and my team didn't like that very much. The stock fell 125. I did buy the stock when we passed on it so that was good. And so that has been an overwhelmingly successful. It is so hard to produce cheap houses but a cheap house, a $200,000 house given where interest rates are, so I'd say that's number one. It's almost impossible to find entry level housing, they just happened to be doing it.

The single-family rental is probably two and multis are three and if I did it in that order but again, I said entry level housing not the $700,000 or $800,000 house. I’d reverse single family rental to be one, multis two and that business three. I think that business will slow down, post-COVID. So I think entry level housing, anything workplace housing, workforce housing, anything in the low end, the nation has a massive deficit of affordable housing. So that's been, as you know, an area for us that we've been buying too.

It’s very hard to do entry level housing because the land is expensive and all the add-ons, especially in California, all the things you have to do in order to build houses, you can't do a house for $200,000 in California, it's not possible unless they give you grants. One of the things Trump did which was interesting is he cut real estate taxes on half on affordable housing and I have to say, to induce new construction, that was a very smart thing to do. And one of your questions or one of your client’s questions about opportunities zones, we did a fund or two but it's really, it's a lot of work and the huge urge to find opportunity fund deals seems to have declined, you don't hear a lot about it these days. So we will do them but not as a one-off now, not with a fund. We invested our fund, it was small, it was like $300 million and I think we did 8 or 10 deals or something like that, a lot of them were things that were under construction that wound up being an opportunity zone and qualified. We built a school here in the Bronx on a 30-year lease right next to a new project related building, so we did that, but for the most part we stuck to multis in markets we thought we'd be fine in 10 years because you have to hold everything 10 years so that become a focus for us.

WW: So two final things because we got about five minutes left. The first one is are you making any investments right now in either properties or in the operations of Starwood that are, if you will, thinking that we're in this pandemic longer than people are expecting. In other words, I had a meeting yesterday with my team to convert our main conference room in Bethesda into a COVID safe conference room because my thinking is that…

BS: There’s no people in your conference room.

WW: Unlikely until a year from now where we're able to just go into a conference room and everybody will be able to interact without a mask on so I'm trying to figure out whether we can create a safe environment in a conference room so we can do board meetings and other meetings face to face and it'll be a significant investment but I'm sort of sitting there saying I'll be happy to do it as long as I've got that. Are you doing anything at a property level that just sort of says I'm not going to hope that we've got a vaccine in Q1 but we're going to invest that we're in this thing for the next year or two? 

BS: No, I think the protocols we are putting in place will stay in place through the period there's no vaccine and, you know, maybe I shouldn't say this but we haven't had any incidents at the office at all, any of our offices, and actually people have called in because they were in contact with somebody that got COVID and they stayed home for two weeks. We have, one of my guys went to LA for a wedding and he said he's going to quarantine for two weeks because he went to LA because you're supposed to do that even though he doesn't have COVID, didn't come down with COVID.

I don't know, what's really another pet peeve would be cases versus deaths and if you're a Democrat and CNN you hear about the cases and if you're Republican you hear about the deaths of which there have been very few relative to the case-loads going forward as the youth get this disease. So, I mean it is a terribly debilitating thing for the elderly. Maybe because I started COVID in Florida I was not incapacitated by the disease and people are traumatized in the northeast. I mean I have friends, they’re like dear friends and they don't want you to walk within 12 feet of them. I have to respect that. But I think no, the answer is no. We are buying properties, we are investing, we are looking for things to do all over the world and actually buying a hotel I think, it's in the UK so I won't tell you where it is but I think we're buying it really, really cheap and we'll fix it up. We'll probably spend three times the money renovating it and repositioning it as we're paying for the box and I like those deals because I think they work in any market assuming that the city is a major city in the UK, assuming that this does end at some point.

Willy, there was the Black plague and that ended. There was the Bubonic plague and that ended. There was a Spanish flu and that ended. There will be an end to this, it will stop. There are no deaths in Hong Kong, there's 100 cases in the country of Korea, 100 cases a day, there’s probably 100 cases in Stanford, Connecticut a day. So our just completely dysfunctional leadership both at the state, city, and national level has let this thing go on way beyond and way worse than it ever should have been. And my favorite, and it's not popular, but if you look at Sweden it's the lowest, it's the fourth best or fourth lowest incidence R ratio in the world right now. So they did, they never shut, they admit they screwed up, they should have protected their elderly and they would have had a lot fewer deaths. But that's the facts, those are data, that's real facts and so I'm still in that camp, I'm in, this thing's going to roll, kids want to get it because they’re not going to die, they're partying at the schools. Brown University, my alma mater, the most liberal college in the United States, and it is the most liberal college in the United States, they're open with in-class classroom.  And I was talking to the President yesterday and I said what’s going on and she said well the kids aren't partying. I said well how’s that? She said well it’s kind of a contract now because they know if they party, they're going to get infected and I'm going to cut in-class classroom classes, so they are behaving themselves. Which is fascinating, it's a fascinating example of like, the kids are saying okay I want to be in class with my peers, and they're testing, they have aggressive testing protocols at the universities, Harvard the same thing, but they're not doing in-class, Brown is, and so far it's working. So, there is an alternative way to get through this if people are responsible and I think our employees are, my partners at Starwood have been incredibly responsible and I applaud people getting back to work. It's like what Jeff Blau said from Related in his Op-ed piece, and also in person, like it's not just us, we have dry cleaners and restaurants and services that count on us to be back in these cities, the city needs to get going and people have got to get back to work. I'm optimistic that the nation, there are a lot of good people in this country and as a whole we're going to get through this. And, you know, where the equity markets are on any given day, this is still by far the best system. So, you know, capitalism needs to be regulated but it's still the way we've created great advances in society.

WW:  Final question because you were so good at predicting the last six months, I'm going to go out to a year. President of the United States, where’s the Dow, and where’s the 10-year? 

BS: On TV I said I’d vote for Biden because the nation needed to heal but I was caught off guard, I really, I didn't know what to say. I should have said my mom, I was going to vote for my mom and she's 86, she’s about as old as old as Biden and Trump. She’s actually very on it. So I think, it depends on who votes, and it depends on who votes in those swing states, and in Florida if Bloomberg can make a big impression on Florida with his spending, if he does that it’s going to be hard for Trump to win if he doesn't win Florida. I live in Florida so I'm going to vote multiple times …. So I don't, it’s a draw, I can't call the Presidential election. I think the equity markets will be flat to down. If they're at 28,000 on the Dow, I think it'll be 25,000, 24,000. There's no place to put money and that is really the one thing that’s driving the equity markets and the tech stocks will have some kind of revaluation as people realize that you can't grow into these multiples, they're too high. And the 10 year will probably be within 50 BPS either way.

WW: 50 BPS, 50 BPS?

BS: I don’t know, there’s been talk of zero interest rates in the United States. It’s like I'm flipping through my textbooks from business school, I can't find that, so I don't know what that means. I mean it is tied to global rates, right, and negative rates still prevail in parts of the world so I would say, you know the interest rates in the U.S. cannot soar to 3-4 percent if Germany is going to have negative rates, the dollar just would skyrocket and our economy would crater so I don't really understand it but I'll stick to what I do know which is how to renovate a property.

WW: Well you also know how to give us great insights into the world we're living in today and I’m very grateful for you taking the time.

BS: Well I don’t want to mislead anyone, it's just an impossible scenario.

WW: Great to see you. I greatly appreciate the time and I'll talk to you soon.

BS:  Always good Willy. Thank you all.

WW: Thanks, Barry. Take care.

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