Source: Golden Ten Data
The real estate mogul said that the interest rate hike would damage the interests of regional banks, and “maybe two regional banks will go out of business in a week.”
Real estate mogul Barry Sternlicht (Barry Sternlicht), CEO of Starwood Capital Group (Starwood Capital Group), said that the Fed's “toolbox” was inappropriate when talking about the Federal Reserve's inability to effectively control inflation in the current economy by raising interest rates alone.
“Powell has to be very careful because his toolbox is flawed,” Sternlicht said on the Starwood Property Trust (Starwood Property Trust) first-quarter earnings call on Wednesday. At the same time, he urged Powell to cut interest rates before the November US election.
“The US economy did not collapse as we expected. The reason is simple: Americans have jobs and their balance sheets are fixed. They have fixed-rate mortgages, and also have $235 billion in cash interest income. This cash is held in money market accounts, and the yield is 5%.”
However, after the Federal Reserve's most aggressive rate hike since the 1980s, consumer credit began to crack. However, Sternlicht believes that the biggest victim of rising interest rates is the federal government, whose interest expenses have doubled since 2020 to about $1 trillion.
Sternlicht said that regional banks are victims of other “collateral damage,” and that interest rate hikes “disrupt commercial real estate valuations across the country and the world.”
This spillover “isn't just a theoretical issue,” he said, “because cities and local governments rely on real estate taxes on these commercial properties to maintain schools, police, waste management, and all other services they provide to the community.”
At the time of the upcoming liquidation of commercial real estate, Sternlicht gave ominous predictions about the future of regional banks in the US. He believes that regional and community banks, which are the main lenders of real estate, may soon be affected by high interest rates and inflation.
“You'll see that maybe two regional banks will go out of business in a week,” Sternlicht said.
There are more than 4,000 regional and community banks in the US, and many of these banks may not have enough cash flow to handle significant losses in real estate debt.
The entire real estate industry is being hit, particularly commercial real estate, and commercial real estate vacancy rates continue to rise due to the rise of remote and hybrid work models.
Steinlicht has been sounding the alarm for more than two years. In an interview in January, he said it was an “existential crisis.” Earlier this year, he predicted that office properties alone would lose $1 trillion.
Sternlicht said, “We could have dealt with this problem, but we couldn't do it so quickly. That $1.9 trillion real estate loan is now a vulnerable entity.”
Since the beginning of 2024, only one regional bank has closed in the US. Last month, the Federal Deposit Insurance Corporation (FDIC) took over $4 billion in deposits and $6 billion in assets from Republic First Bank (Republic First Bank), which owns a large amount of commercial real estate.
Others echoed Sternlicht's warning. RXR CEO Scott Rechler (Scott Rechler) made a similar forecast earlier this year, believing that the US will have 500 fewer banks by 2026. “Community banking is important to the fabric of our society,” Sternlicht said in an interview on Tuesday.