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Forget what the economists say, the U.S. is headed for a recession — and Federal Reserve Chairman Jerome Powell is to blame.
That’s according to billionaire investor Barry Sternlicht, who said the Fed reacted too late and too strongly before sending the economy into a “category five hurricane.”
“It’s sort of a black cloud 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 told Bloomberg Wealth.
Sternlicht, whose Starwood Capital Group owns billions in office, hotels and residential real estate, said he was both critical and empathetic of Powell.
“I’m critical of Powell because…a portion of the data they use is quite lagging. They didn’t see inflation when it was here, and when they showed up they showed up late and big.”
Those aggressive actions — an attempt to slow the economy and tame inflation — have created a situation where no one in real estate wants to sell.
“Unless you have to sell something today, nobody wants to sell anything today,” Sternlicht said.
The Fed has raised the federal funds rate 525 basis points in a series of rapid and ongoing rate hikes that continued Wednesday when the Fed raised the rate another quarter point. Rates are now the highest they’ve been since 2001.
Sternlicht acknowledged the Fed needed to raise interest rates. But other actions should have been avoided.
Powell “shouldn’t have been buying mortgages into May of ’22. That should have stopped so much earlier. We didn’t need him to do that,” Sternlicht told Bloomberg’s David Rubenstein. “When he finally stopped, he went the other direction and went so far, so fast.”
“I’m saying, just wait,” he added.
Sternlicht pointed to the dire situation in the office market, which has seen record high vacancy rates that has sent the value of older office buildings plummeting.
He said those older and highly vacant buildings will eventually need to be torn down, because “there won’t be anything else to do with those buildings.”
Federal Reserve Board Chairman Jerome Powell (Photo by Alex Wong/Getty Images)
Commercial real estate transactions have plummeted, with owners holding out hope to obtain for pandemic-era prices and buyers unwilling or unable to acquire with the higher cost of borrowing. That’s part of the gathering hurricane, Sternlicht said.
The credit market also rapidly tightened as a result of high interest rates and after the failure of two major banks earlier this year.
An estimated $1.5 trillion in commercial real estate loans are set to come due throughout 2023 and 2024, according to the Mortgage Bankers Association.
Still, the Fed hasn’t signaled a willingness to stop its rate hikes and indeed kept open the option to continue raising rates this year.
Sternlicht said the Fed is missing the storm headed the country’s way.
“One of my friends had a meeting with one of the [Federal Reserve] governors recently, last week,” Sternlicht said. “They’re like, ‘We hear all this noise about real estate, but we don’t see the issues.'”
“They’re going to come,” Sternlicht said. “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.”
Economists have been cautiously optimistic that the U.S. would avoid a recession despite real estate woes.
A report from the U.S. Bureau of Economic Analysis released yesterday showed the national economy grew at 2.4 percent annual rate in the second quarter.
“It feels like the last gasp before we actually settle into what you’d expect to be — I hope it’s a shallow recession,” Sternlicht said.
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