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‘Tourists’ May Leave Real Estate as Rates Rise, Sternlicht Says

Barry Sternlicht, CEO of Starwood Capital Group LLC
Barry Sternlicht, chairman and chief executive officer of Starwood Capital Group LLC, speaks during the 2010 Milken Institute Global Conference in Los Angeles on April 26, 2010. Photographer: Jonathan Alcorn/Bloomberg

April 27 (Bloomberg) -- U.S. commercial real estate investors may turn to other opportunities as vacancies remain high and interest rates rise, according to Barry Sternlicht, chief executive officer of Starwood Capital Group LLC.

“There are a lot of tourists in property and REITs right now,” Sternlicht said at a panel discussion yesterday at the Milken Institute Global Conference in Beverly Hills, California. “Everybody is racing for yield.”

If interest rates head higher, “you will see a pause that will take a lot of capital out,” he said. Corporate bonds may benefit, according to Sternlicht.

A rebound in the real estate market is being hampered by weak demand and commercial-mortgage-backed financing that declined 95 percent last year from its record level in 2007. Vacancies in the first quarter rose to the highest level since at least 2000 at the nation’s biggest malls, and climbed to a 16-year peak at office buildings, research firm Reis Inc. said earlier this month.

U.S. commercial real estate values in February fell to 42 percent below the market top in October 2007, according to the Moody’s/REAL Commercial Property Price Index. Almost one-third of repeat sales transactions were of distressed properties, compared with less than 20 percent in early 2009, Moody’s said.

The Federal Reserve said earlier this month that the economy expanded “somewhat” across most of the U.S. in March as consumer spending and manufacturing improved, signaling the recovery is broadening without gaining much speed. Fed Chairman Ben S. Bernanke and his colleagues have been debating how and when to tighten credit, including whether to modify a pledge to keep interest rates low for an “extended period.”

Special Servicers

Deal volume may increase in 2011 when distressed buildings that have been surrendered by owners to special servicers reach the market, Michael Van Konynenburg, president of commercial brokerage Eastdil Secured LLC in Los Angeles, said during the panel discussion.

Clearing the inventory of foreclosed properties will result in “a lot more” financing through the issuance of commercial mortgage backed securities, Van Konynenburg said.

Cheap debt fueled the commercial property surge with a record $237 billion in CMBS sales in 2007, according to JPMorgan Chase & Co. Such sales fell last year to $12.2 billion.

The expected discounts for distressed buildings haven’t materialized as investors holding “mountains of cash” compete for those deals, said Sternlicht, whose firm is based in Greenwich, Connecticut.

“We were all joking that the distressed cycle lasted about two months,” he said.

Any discounts for commercial real estate in distress have probably come and gone, Sternlicht said.

“I’m not sure that we’re going to see great opportunities,” said panelist Richard LeFrak, CEO of New York-based LeFrak Organization Inc. “I’m sorry, but I missed the whole thing. It’s like we blinked and it went away.”

To contact the reporters on this story: Dan Levy in San Francisco at dlevy13bloomberg.net; Daniel Taub in Los Angeles at dtaub@bloomberg.net.

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net.

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