The Blubber

Barry Sternlicht, co-founder, chairman, and CEO of the $115 billion real estate giant Starwood Capital Group, expressed concern about the more than 4,000 regional and community banks in the U.S. With the real estate industry facing challenges from higher interest rates, vacancies, and inflation, Sternlicht warned that its preferred lenders may face difficulties.

"I think people are looking for these cracks, and you're going to see the cracks develop now. You're going to see a regional bank fail every day, or not—every week, maybe two a week," he told CNBC on Tuesday.

Despite Sternlicht's prediction, only one U.S. bank has failed so far this year: Republic First Bank, a regional lender operating in Philadelphia, New York, and New Jersey. The bank collapsed, with roughly $6 billion in assets and $4 billion in deposits seized by the Federal Deposit Insurance Corporation (FDIC) due to issues with rising interest rates affecting its significant commercial real estate holdings.

Sternlicht has been warning about impending problems due to rising interest rates in the real estate and banking sectors, as well as the entire economy, for more than two years. In September 2022, shortly after the Federal Reserve began raising rates to combat inflation, he criticized officials for using "old inflation data," particularly related to housing, to address the economy unnecessarily. A month later, Sternlicht suggested that the entire economy was facing difficulties due to soaring borrowing costs, indicating an imminent recession.

However, by the summer of 2023, the U.S. had shown resilience to higher interest rates and inflation. Sternlicht acknowledged that his recession calls were premature, admitting that he "did not understand the strength of the consumer." Nevertheless, he still believes that certain segments of the economy, such as real estate and regional banking, cannot withstand Fed Chair Jerome Powell's rapid rate hikes.

"He's got a hard task, with a blunt tool, and the consequence is the real estate markets are taking it on the chin because rates rose so fast. We could have handled this, but we couldn't handle it this fast," Sternlicht said. "The $1.9 trillion of real estate loans, that's a fragile animal right now."

Calling for the Fed to lower rates again, Sternlicht believes that lowering rates would make the assets of community banks worth more and help inject capital into these banks. He emphasized the importance of saving community banks, which play a critical role in the American economy by providing loans to small businesses or farms that larger banks often overlook.

Sternlicht expressed optimism that Powell will cut rates sooner rather than later, potentially saving some of these banks. He argued that interest rate hikes may not be effectively reducing inflation and are instead causing unnecessary damage to real estate and regional banks. Sternlicht believes that Powell is beginning to recognize this and will want to lower interest rates to reduce interest costs, especially given the weight of the $34 trillion national debt on the federal government's budget.