Starwood CEO Barry Sternlicht: 'The Endgame For Amazon Is To Wipe Out Main Streets Of America'
UPDATE, FEB. 14, 1:30 P.M. ET: Amazon has canceled plans to open a headquarters in Long Island City. This story reflects statements made before Amazon's latest decisions.
Starwood Capital Group CEO Barry Sternlicht was not happy about Amazon's HQ2 decision and is sharply critical of the way fellow billionaire Jeff Bezos runs his company. The real estate executive also believes President Donald Trump's immigration policies are hurting the U.S. economy, and he predicts a recession will come in 2020.
Sternlicht shared his strong opinions on these and other topics in a phone interview with Bisnow Thursday afternoon. The CEO will speak on Nov. 28 at Bisnow's Multifamily Annual Conference East in Tysons, Virginia, alongside Greystar CEO Bob Faith, with whom he co-founded Starwood in 1991. Sternlicht has since grown Starwood to a global giant with over $50B in assets under management, including major holdings in multifamily, hospitality and other sectors. This interview has been edited and condensed for clarity.
Bisnow: You founded Starwood with Bob Faith in 1991. How did it get started and what did the company look like in those days?
Sternlicht: Well I knew Bobby from business school. We were friends from business school at Harvard. I had met Dan Stern who at the time was working for the Vanderbilts. Dan said he’d back me in my own real estate firm. I was a deal guy, I had done a lot of big real estate stuff, but I didn’t consider myself a construction expert. I needed a partner so I called Bobby and I arranged to get $10M from the Ziffs and $10M from the Vanderbilts and my old boss gave us a million dollars. And that was the start of the firm.
As we grew, I basically put together a portfolio of 8,000 units and we went market, we went to RTC auctions literally in fields where there were bands playing and we're buying notes.
We went public and we tripled our investors' money in 18 months. Fifty dollars turned to $150. Bobby wanted to go south, and I decided I would go east with my firstborn child and second child and my wife and parents lived in New England. So he moved south and I took the rest of the firm, and he formed Greystar and I kept the name Starwood.
Sternlicht on the Multifamily Market
Bisnow: You're speaking at our annual multifamily event, BMAC East, in a couple of weeks, so I would like to hear your outlook on multifamily. I saw Starwood sold an $835M apartment portfolio in September. Are you a net seller of multifamily? What's your overall investment strategy?
Sternlicht: I’d say our goal would to be net neutral, but we will sell because we have funds that have to sell and new funds we have to invest. We have a constructive outlook on multifamily, but we might be selling at the same time we might be buying and it’s because we’re selling from an old fund and buying from a new fund. I don’t think we have a negative outlook. I think we have an opinion of which markets to be in obviously, and they’re not all the same and which kinds of asset quality we want to be in. But I wouldn’t say we’re negative. I’m not negative.
Bisnow: You said you have an opinion of which markets you want to be in, I’d like to hear which markets you think are the most promising right now. Where do you see the most opportunity?
Sternlicht: How about I keep that as a little secret.
Bisnow: Can you give me any thoughts on what part of the country, what types of cities you’re looking at?
Sternlicht: I’d say we’re not buying in the big cities. We’re not buying San Francisco. we’re not buying New York. We’d buy Los Angeles we but haven’t been able to find anything. We’re not buying big cities. We’re buying smaller growth markets. Certainly the Northeast and much of California is not available to us at the returns we’d like to see.
Bisnow: What do you think are the effects of rising construction costs on the multifamily market? How is it affecting your strategy?
Sternlicht: In many markets, rents are rolled over and they’ve reached the point where people can’t afford the rents in some of these cities given the percentage of their income. I think people are hesitant today, because if they’re honest with themselves, they can’t trend the rents. If they’re honest with themselves, they’ll probably deliver more expensively than they thought.
I think everyone’s nervous. Investors and others should be nervous that that won’t exist, that rents in many markets won’t trend up. Don’t forget most of what’s getting built is Class-A institutional stuff. I suppose if you have a 10-plus year view or five-plus year view, maybe you’ll be OK, but we don’t have that luxury in the core business we run. So that’s good for existing multifamily, and if costs go up, everything you own is worth more, and it's harder to add new supply. That creates supply constraints, and if you own in those markets, you should be OK.
Sternlicht on the Economy and President Trump
Bisnow: I'd like to hear your overall view on the economy. I saw you give an interview on CNBC a few weeks ago and you expressed concern over signals of a coming recession. How close do you think we are to an economic downturn?
Sternlicht: Barring an exogenous shock like a Trump indictment, I'd expect the economy will decelerate fairly significantly in 2020. But not to negative GDP growth, although you could come close. Consumer and business optimism is great. But we don't have that $300B stimulus package. It's like a fireplace and the kerosene runs out and you've got the wood burning, but will the wood keep burning without the kerosene? I think it'll burn, it just won't burn as bright or as long.
And I think also the disastrous, idiotic immigration discussion where we desperately need these immigrants and we desperately need to retain and train workers with H-1B visas and even nonresident visas. We're making it really hard and there are two unforeseen consequences. One, bottlenecks in the economy are going to cause tremendous strains on business and industry. And as you're growing, if you need to hire 30 engineers you're not going to put your plant here because you can't hire the people here. Maybe they're Indian and at MIT and have to go home, so you'll build your plant in India or somewhere else.
The second problem is simply it creates mass shortages. I mean you're talking about FoxConn, what a stupid project that is, to give tax breaks that won't pay back until 2042 and it's supposed to hire 10,000 workers and now they're going to hire like 800, and they're going to be researchers not factory workers. Does anyone notice the unemployment rate in Wisconsin is 2.5%? Where are they going to get 10,000 people?
We're doing a major TV movie in our presidency and the reality is quite different on the ground. Some of these actions will have consequences, including last month's $100B deficit up from like $68B because receipts are nowhere near what they expected and expenses are rising.
I don't see a logical explanation for rates not to be significantly higher, other than the economy goes into recession. That's the only explanation I can have for interest rates to stay where they are. If the base case is rates do gently rise or rise even faster as we pile on debt, I think you see a significant slowdown and a correction in the stock market, which you're already seeing, and which will be a self-fulfilling prophecy. So I'm not that bullish on the economy, and I think you have to cherry-pick your spots.
Bisnow: What impact do you think the tariffs and Trump's actions with China are having on the economy?
Sternlicht: Most business people will tell you the concept of cutting a better deal with China is a good idea. China has arbitrary trade barriers and tariffs. How they got the WTO keeping all that stuff is hard to understand. On the other hand, this isn't how you negotiate. These are complicated issues, some of them touch on national security concerns. The end of it is that it has created general uncertainty.
Even the steel tariffs, which some people say will create more secondary jobs, when steel prices go up 30%, a lot of projects that you thought were going to get built just don't get built. I think when we're nervous about costs — and everyone should be nervous about costs — the tariffs have really impacted your ability to project construction costs. And it should be fairly obvious that you would have a problem, you would have some hesitation in planning your next investment.
The trade stuff on China is unique, I mean we have that $500B trade deficit, and they didn't steal it. Americans demanded we get things cheaper. My father had the same issue when he was manufacturing flashlights in Norwalk, Connecticut, and Walmart said they wanted to buy the flashlight cheaper and the only way he could make it with labor costs in the U.S. was to go to China. He didn't want to go to China, but he had to because Walmart needed the flashlight for $2 and that's how this happened.
But the other part of it is the difficulties of Americans to access Chinese markets that obviously have fixed currency, which is playing the game with a loaded hand, and the intellectual property issue. Everybody sort of knows that you couldn't keep a trade secret very easily. On that stuff, the administration is probably 100% right.
Sternlicht on Amazon
Bisnow: I’m interested in hearing your thoughts on the big news in the business world this week with Amazon selecting Northern Virginia and New York City to split its second headquarters. What were your thoughts on that decision and what it means?
Sternlicht: I was super disappointed in the cities they chose. Neither city needed them. And the fact that New York is in an opportunity zone and they got $5.5B of credits for the $5B of investment. I’m not a fan of the gifts. I mean, really? Amazon, a $1 trillion company doesn’t have the resources to build a plant? They need inducements? A $1 trillion company. And by the way, Amazon’s job these days is to put most everyone else out of business. So you’re facilitating that. Mom and dad can’t get a $5B tax break to expand their dry cleaners.
If you're Amazon and you want to be a responsible corporate citizen just say, 'No. We can do this on our own. We're big boys. We're worth $1 trillion. We'll build these plants on our own.' Why not go to a city like Atlanta or Miami, and why pick some place that doesn't really need you? And those are congested cities, particularly New York, and the fact that it's in an opportunity zone so they'll never pay taxes on the building and land. I find it abhorrent. I think it's just awful. It's like a free headquarters. Why doesn't somebody give me a free headquarters?
Bisnow: With these business incentives that have been controversial, do you blame states for playing this game or do you think it’s more on the company for demanding they put this much money up to sway their decision?
Sternlicht: If I was as profitable, I mean Bezos started recently some charity for something, but this is a man who’s worth more than bitcoin; $110B. Does he really need, does his company really need these subsidies that will bankrupt and take resources away from teachers and firemen and policemen? If he wants to be a responsible corporate citizen, he should say, ‘We don’t need your assistance.’ And by the way, don’t tell me he’s the doing the right thing for shareholders because I believe he’s not long-term. Maybe short-term, but not long-term. It’s not smart.
And now he’s going to put pizza people out of business. Amazon was fine when they helped little businesses survive, now they’re actually going after little businesses. And that’s not healthy for this country. You’re creating a monster. Now you’re funding the monster to destroy mom and dad’s businesses. That ain’t a good deal.
Bisnow: What can be done to address the problems you see Amazon as causing? Do you think it is something the government can address?
Sternlicht: I think the government's job is to defend the nation. I am not an interventionist. But there are things that are monopolies that are regulated because otherwise they gouge consumers.
The endgame for Amazon is to wipe out main streets of America. Maybe if the consumer is so busy he's OK with that. But I can assure you they don't know the consequences of what they're doing. Those commercial businesses along main street pay the real estate taxes that fund schools and if they go away, and most assuredly they are going away, then taxes on individual homes will have to go up to pay for the support system.
I don't think the average person spends a lot of time thinking about that. It's really convenient to have them deliver a bicycle pump to your house that costs $20 for free in an hour. By the way, that's predatory pricing. In the industrial commodity complex if you sell aluminum below the cost of consumption of aluminum, it's called dumping and it's illegal. They've been allowed to get away with that forever. They've lost more money in shipping than they made in the margins on the goods that they were selling. That's predatory pricing and they were never called out on it. In my view, what they're doing is illegal, and it crushed mom and dad. How can you compete with that?
The endgame where the consumer will get really crushed is when my little store that I used to go to buy my pump is out of business and Amazon will charge me $80 for a pump and $200 to have it delivered. The government put restrictions on the sale of vaping for teens. That's the government looking to the future and saying it's not good for teenagers. The government could look to the future and say, 'You're going to destroy America as we know it today, and we can't let that happen.'
It has nothing to do with the post office, Donald Trump is wrong. It has everything to do with their business model, which is illegal in any industrial complex.
Sternlicht will speak alongside Greystar CEO Bob Faith and Walker & Dunlop CEO Willy Walker at the Bisnow Multifamily Annual Conference East, Nov. 28 at the Ritz-Carlton Tysons.