"Doomsday Trainwreck" Is Coming To Manhattan Luxury Real Estate, Barry Sternlicht Warns

Tyler Durden's picture

It's been a while since we checked in on the state of Manhattan's ultra high end real estate market, and judging by what was said in the latest Starwood Property Trust earnings call, where CEO Barry Sternlicht warned of a doomsday waiting at the end of New York's "Billionaire's Row", what's coming is nothing short of a disaster. During the Starwood Q2 earnings call, Sternlicht said the development of ultra high-end residential building on West 57th Street - where two years ago Bill Ackman among others parked $91.5 million  - an imminent "debacle." He pointed out the out-of-balance mezzanine loan at JDS Development and Property Markets Group’s 111 West 57th Street project and predicted more distress in the luxury residential market, including at 53 W 53, a supertall condo being developed next to the Museum of Modern Art by Hines, Pontiac Land Group and Goldman Sachs, as the Real Deal reported.

“We are beginning to see the cracks of the high-end residential market in Manhattan,” Sternlich warned, putting in jeopardy future seasons of Million Dollar Listing. “The building on 57th Street just went through it’s B-lender. Those deals, and the building going up next to MoMA, those deals are going to be a disaster. So high-end resi in New York really is in trouble.

Sternlicht also noted that just like during the last bubble peak, most exposed to loans backing luxury condos are not the banks but rather hedge funds, private equity firms and alternative lenders chasing high returns who have backed projects with asking prices of $7,000 to $10,000 a foot.

Sternlich went on to note that “there’s a hedge fund that made $1 billion mortgages against some of these properties out of Europe and we will see how that fares,” which according to RealDeal referred to the Children’s Investment Fund, which has backed the likes of 432 Park Avenue and 76 Eleventh Avenue. “Maybe they like the return, but they will lose capital. They can’t get paid off and they find out their basis is accreting because they are not getting paid currently, obviously….That is not going to end well.

Meanwhile, Starwood can't wait for the crash to come fast enough: "I think we kind of want a train wreck,” Sternlicht said. “We like those markets. We like capital getting scarce.” Starwood has been an aggressive - but not too aggressive - lender in New York’s commercial real estate market, backing the likes of 10 Hudson Yards and the Public hotel at 215 Chrystie Street. Sternlicht is not alone in expecting a funding crash: Vornado Realty Trust’s Steve Roth recently said he also saw an opportunity “to feed on the carnage” in the struggling retail sector.

And while the hedge funds are still "in it to win it", Sternlicht pointed out that commercial real estate investors are getting worried about foreign investors leaving the market amid the recent Washington turbulence, noting that property sales have declined and the gulf between asking and selling prices has widened. Those foreign investors, particularly those from Asia, bid up the price of assets dramatically and affected underwriting. He referenced Anbang Insurance Group’s purchase of the Waldorf Astoria Hotel and its purchase of Strategic Hotels & Resorts. As we discussed recently, Anbang was recently instructed by Beijing to sell its offshore assets as China cracks down on offshore capital flight, demanding that foreign funds be repatriated. A firesale by recent Chinese buyers could be the spark the send the Manhattan market crashing.

“All the markets price off the top bid and the top bid has been an Asian bid, whether it was the sale of the Waldorf or the bailouts of a Strategic Hotel deal. Everybody thinks they are rich when the guy pays the 2 percent cap for an asset, or a 1 percent cap. If there are six bids at $1 billion and one guy is at $1.5 billion, I would ask you to tell me where the loan-to-value is of the loan, right?

Sovereign wealth funds may also leave the market depending on how the Trump administration handles certain issues, including its position on the Gulf countries’ dispute with Qatar, which has been accused of funding terrorism, he said according to TRD. “If you are having a fight with our administration, you are just not going to invest here,” he said. “They are very quick to shut down the capital flows… It has to do with politics."

Of course, it would delightfully ironic if Trump ends up being the catalyst for the next crash in Manhattan luxury real estate - the result of nearly a decade of easy money policies under the previous administration - wiping out a substantial chunk of his own net worth in the process.

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medium giraffe's picture

OMG! I couldn't give a fuck less!

HRClinton's picture

Keep an eye on Trump condos and office rentals.

PT's picture

If you can't afford to buy a house then you sure as hell can't afford to buy anything to put in it.
If you don't buy a house you can buy lots of crap but there's no point because you have nowhere to store it all.

But thems is stupid ideas becoz it involves maffs and maffs is hard and you can just borrow munny anyway.  Ponzi Finance For The Win!

Countrybunkererd's picture

Ok, which one of you bought the 83K acre ranch in CO?

Stuck on Zero's picture

Now is the best time to start construction planning for the next big supercondo tower in New York. It will take ten years to get through permitting and construction and be ready just in time for the next big boom.

Bigly's picture

I will buy a 500 sq ft condo there...for 50,000.

Gimme a break. Some of those buildings look like repurposed mental asylums. Nasty and all of them have roaches and rats.  50k and not a penny more. HOA is at least 1-1.5k/mo. That alone is stupid

lasvegaspersona's picture

That property has been a jewel  years. I remember wishing we could get on Culebra back in the early 80s.

It is the Southern end of the Sangre de Cristo range and probably no where in the US is more isolated or pristine.

It is part of the Spanish land grants of the (1600s?) that never got divided.

marathonman's picture

No worries.  Janet will keep those CDO's liquid and well contained.  To the moon baby!

CPL's picture

They going to rehypothecated hypothecated debt that was hypothecated around ten times since 1910.  What could possibly go wrong?

Give Me Some Truth's picture

Re: "keep an eye on Trump rentals and office space ..."

Si, I will. This is one reason I always believed Trump would protect the Status Quo, including the Establishment and Deep State, and definitely the "one percent." This is his business market. If these people start to crash, his businesses crash with them.

Anyway, Trump will do whatever he can to protect the Printing Press, the continued issuance of debt to infinity, low interest rates, letting the Fed "do its thing," letting the too big to fail banks and Wall Street get their way, etc. Such a "strategy" (if "keep doing what we've been doing" is a strategy) might help him politically, but it will definitely help him personally ... that is if he still cares about the bottom-line of his businesses.


richsob's picture

Trump & Family will lose billions if the high end real estate market crashes.  I don't care if that happens but I would bet good money it will strongly affect how he wants the Fed to pump, pump, pump to keep things going.  The guy loves cheap money.  And you can bet interest rates will not go up even if they need to destroy the last semblance of a free market economy to keep that from happening.  Negative interest rates here we come; but the inevitable will eventually happen anyway.  NEWSFLASH:: Crash delayed 3 years.

PT's picture

Trump did NOT need to become Prez if that is all he was worried about.  Clinton would have done him just fine.  I'm hoping he got sick of making a dishonest profit out of real estate and was pining for the days when he used to make an honest profit out of real estate.  Yes, very naive of me, I know.  I am not holding my breath.

Give Me Some Truth's picture

Alternate theory on why Trump opted to run for president:

His ego is so massive that this was the only job that could sate it? 

And/or: He likes the attention?

He thought we needed some more former Goldman Sachs guys in government? 

If the U.S. was going to keep playing World Policeman, he wanted to be Sheriff of the World?

It would be good for the Trump "brand?"

PT's picture

He got bored because he had already done everything else?
Just to piss of Hillary (and the Dems and the Repubs)?

PT's picture

Because he knew he was about to be bankrupted by forces beyond his control and the only way to prevent it was to become President?

Because when Real Estate is financed by Ponzi debt then the banksters can bankrupt anyone they like and they can choose anyone and make them rich (just call in everyone else's loans and lend money to their favourite while he buys up everyone else's assets on the cheap).  Real Estate merchants are no longer independent, but completely dependent on the whims of the bankster class.

Hence my guess that he was "sick of making a dishonest profit and wanted to make an honest profit".  It actually had a selfish motivation behind it - survival.  Back in the day he made real profits by whatever skill and shenanigans he learnt, but now "anyone" can take that away from him just by doing the right deals with the right banksters.  And if the banksters want to throw him (or anyone else) on the scrap heap, they can.

Again, I'm not holding my breath on any changes and I would not bet money either way.  Just an idle thought.  Time will tell.

richsob's picture

Keeping interest rates at rock bottom wasn't the reason he ran for President.  It was probably about #7 on his list.  His main reason was ego.  Every politician has an ego but Trump has an EGO.......which is fine with me except he has thin skin.  That is a dangerous combination when you have the Marine Corps, the FBI, the NSA and a little red button that is oh-so-tempting- to push.  He's done everything except Tweet the nuclear codes to show off.  I voted for him but dayum!!  Gimme a break!

PT's picture

Could be true but Ego is no excuse in my book.  He was already very successful.  He used to buy politicians.  ("Buy"?  Too harsh a word?  Does "make donations" sound better?)  Why would a former-briber feel bigger as a bribee?  For all the pomp involved with a "President" tag, surely it would look more like a step DOWN to him and his peers?

"My security detail is bigger than your security detail."
"Shut up or I'll bomb ya!  Gee, this is so much easier than back in the day when I used to have to negotiate everything.  I shoulda done this sooner!"

I can't believe he chose to be President purely for ego's sake.  Guys like him would have more fun manipulating Presidents than being one.  And after manipulating a President, Being a President would be like choosing to be a Patsy.  But I could be wrong.

Scuba Steve's picture

I'm thinking its a combination of everything aove about DJT ...

EGO, family fortune self-preservation, not draining the swamp but at least mitigating it, controlled demolition of rates-market-the leftists capital killing diatribes.

Omen IV's picture

Because.....you dont get it!

Canary in the coal mine -  is high end Manhattan RE - the inevitable effect of sanctions of all description is to wake people up that at any point for "any" pretext Washington can declare your asset in the US -  no matter the amount, type, location -  to be no longer "owned" and act on the basis of whatever whim is in the moment. when you get a vote of 97 - 3 for Sanctions on the basis of > nothing < while Binney shows the complete breakdown of Russian Interference Analysis by NSA and all is Fake - then you get a transfer of logic and potential risk to everything  else in the system.

medium giraffe's picture

Thank you for elucidating the patently obvious, you're providing a valuable service.

I've just checked my giveashitometer however, reading 0.0 and falling.  Lowest since Lehman.

Omen IV's picture

You said:     "OMG! I couldn't give a fuck less!"

what you said - literally  - you had no analysis of the subject only dismissal based upon your lack of discretion of what the data means


so the truth is - despite your followup statement - you didnt figure out what the article meant in many other contexts


this was Sternlicht speaking - Sternlicht !!!!!!!!!! - a very serious guy - and you..... dont give a shit -  Hmmmmmmm

i feel sorry for you - your limitations of intellect are showing

Bill of Rights's picture

Im still trying to decipher why I should give two fucks what happens in NY...I hope the entire state rots from the core out.

Give Me Some Truth's picture

I'm not pulling for the "rotting" of New York State or any state for that matter, but I do think things will "rot from the core" - already are. It's amazing how this spreading cancer can be concealed from so many for so long - which is a testament to the power and influence of the people who are vested in concealing the truth - in order to profit and stay in power for a little bit longer.

assistedliving's picture

do things that happen in the Capitol of the World matter?

I suggest Yes

Saucy-Jack's picture

I worry for Frederick, Steve, Luis, and Ryan.

stitch-rock's picture

Hot loot goin' cold...

jamesmmu's picture
Chart of the Day: Fed to Consumers—-Inflation’s Too Low, Live Under Your iPad!


Pollygotacracker's picture

People in the 'know' are selling off inflated assets while they still can. This will eventually happen with financial assets. Job well done by the Fed.

Give Me Some Truth's picture

Yep. Ron Paul was right. If we could only "take back" the year 1913 - when the Fed and the Federal Income tax were created. 

It is impressive though how long the "powers that be" have kept the game going and how far they have extended the road where that can is being kicked.


PT's picture

104 years later and still no-one has compiled a list of names and addresses and done something about it.

Scuba Steve's picture

I dont think they've extended the road, they just a got a military style "can" as a replacement that can go off-road and take damage but still quasi- roll.

auricle's picture

You know, that high end resi...

you mean toys that rich people no longer want. Plow them under. 

Fake Trump's picture

Chiinese not buying anymore. 

small axe's picture

couldn't happen to a more despicable group of people...

Philo Beddoe's picture

The key is to buy insurance before the collapse.

Give Me Some Truth's picture

Surely, your plug to "buy insurance while you can still get it" is not a veiled plug for the purchase of "safe haven assets" such as gold and silver.

If it is, well, I can only conclude that you are a lowly bug and an asinine kook and you are a person who must be silenced, insulted and ridiculed. And, I hate to say it, but you are almost certainly a traitor who does not love his country. You are very likely a "Russian troll."

(Full disclosure: I am being paid by Russia to post this. Well actually I am being paid by the CIA to write this ... with the understanding that everyone will conclude I am a Russian meddler. I am not. I am a patriot who never goes anywhere without an American flag on my coat lapel. And if you MUST have an insurance policy, do what the Swiss National Bank does ... buy Apple stock and deposit any profits in CDs paying negative .5 percent). 


youngman's picture

Like I care.....

TabakLover's picture

Fuck those fucking fucks

goldoverbtc's picture

Trump will be blamed for anything, chinese are having a harder time getting money out of the country, so they went to bitcoin instead of real estate because of chinese laws being passed.  


JonNadler's picture
so he's shorting the Manhattan Luxury Real Estate market?
Chris88's picture

I wish it would somehow lower my rent, but I doubt it.

Green2Delta's picture

I was in Manhattan last week. Even if I were lucky enough to win the Powerball tomorrow I'm not sure I'd ever go back. I've now been to both a Mets and Yankees home game so I'm not sure what else there is to do in NYC. 

That #7 train to Queens is exactly how John Rocker described it. 


assistedliving's picture

... not sure what else there is to do in NYC

so it's our fault you're a jock strap?


Felix da Kat's picture

All rally's (stocks, commodities, crypto-currencies, Real Estate, and otherwise) are subject to the principles of "Reversion to the Mean" as outlined by Jeremy Grantham. Those who fail to grasp and adhere to such rules invariably fall prey to the hype of the "sucker's rally". It's the same old mistakes ad infinitum. Look for plenty of downvotes from the deluded Bitcoin buyers who feel exempted from such rules.

PrezTrump's picture

All rallys are subject to supply and demand. Concepts you clearly dont understand. 

Cardinal Fang's picture

Stern Lick is an apt description.