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.