'Undisciplined' lending fuelling real estate bubble

Starwood founder Barry Sternlicht has warned that in the search for yield in the US, some lenders are returning to the days of 2007 and 2008 and failing to underwrite actual cash flows.

Real estate lenders in the US are in danger of repeating the same mistakes of 2007 and 2008 by offering ever-increasing loan-to-values without the cash flow to back up the deal, according to Starwood Capital Group chief executive officer Barry Sternlicht.

Sternlicht said he was “very worried” about the state of the lending market, saying in the rush to lend – particularly against core assets – some financial institutions were becoming “undisciplined” pushing LTVs higher but “without the [underlying] cash flow”.


“If you look at what is happening to real estate, it is exactly what happened in 2007 and 2008 when cap rates were plunging and LTVs were going up without cash flows,” he said during a third quarter earnings call for Starwood’s mortgage REIT, Starwood Property Trust (SPT). “We are a bit in a bubble.”

With interest rates expected to rise over the next two years, and economic growth expected to be slow over the next few years, industry professionals have questioned how some deals have been underwritten. Sternlicht added that he was “worried about some of the deals” being done currently, particularly when senior AAA pieces were trading in the 3 percent to 4 percent range.

Starwood raised more than $921 million following an IPO of its mortgage REIT in August last year. Earlier this month, SPT hired the team behind Countrywide Financial’s commercial real estate finance arm, including founders Boyd Fellows, Stew Ward, Chris Tokarski and Warren de Haan.

Sternlicht said the team was part of SPT’s plans to become a $6 billion commercial real estate lending company. As part of those plans, the REIT also expected to start packaging CMBS securitisations itself. “At some point we would not mind doing our own securitisations,” he said, adding that the firm was in the process of negotiating two additional credit facilities, which would be place “momentarily. They will enable us to do that kind of packaging ourselves.”