Two of the most influential figures in real estate and technology investment, Barry Sternlicht and Brendan Wallace, are navigating a landscape transformed by artificial intelligence, fluctuating interest rates, and shifting global opportunities. In a recent discussion, the heads of Starwood Capital Group and Fifth Wall shared their perspectives on the challenges and immense potential shaping the future of property and technology.
Their insights reveal a cautious optimism, tempered by concerns over AI's economic impact and the sustainability of the current tech boom. While legacy real estate grapples with the fallout from rapid rate hikes, new opportunities are emerging in data centers, European markets, and undervalued urban centers like New York City.
Key Takeaways
- Barry Sternlicht anticipates interest rates will decline, especially after a new Federal Reserve chairman is appointed next year.
- Brendan Wallace notes that the commercial real estate slowdown has impacted property technology (PropTech) investment and decarbonization efforts.
- Both investors see massive growth in data centers driven by AI, but question the long-term economic sustainability of the AI boom.
- Sternlicht is currently favoring European real estate investments over the U.S. due to lower rates and a more stable economic environment.
- Despite short-term political shifts, Wallace believes in the long-term value and resilience of the New York City market.
The Aftermath of Interest Rate Hikes
The real estate market is still processing the effects of a rapid 500 basis point increase in interest rates. According to Barry Sternlicht, chairman and CEO of Starwood Capital Group, this sharp rise forced many investors to pay a price. “Your costs went up, your expenses, and they drained a lot of cash flow from assets that might have gone into fixing the assets up,” he explained.
However, Sternlicht believes the worst is behind the industry. He expressed confidence that interest rates are set to decline. He pointed to the end of Federal Reserve Chairman Jerome Powell's term next year as a key catalyst. “In May of next year, Jerome [Powell] will be out, and nobody’s getting that job without agreeing to lower rates,” Sternlicht stated.
This rate environment also had a significant impact on the property technology sector. Brendan Wallace, co-founder of the venture capital firm Fifth Wall, explained that the rate hikes “impacted prop tech definitionally, because all tech companies, all loss-making businesses, rerated all at the same time.” The demand from commercial real estate for new technology also stalled, creating a dual challenge for the sector.
The AI Gold Rush and Its Economic Questions
The explosion of artificial intelligence has created an unprecedented demand for data centers, a sector where both investors see tremendous activity. Sternlicht revealed that Starwood Capital has approximately $20 billion dedicated to the data center space. He noted that the standard practice is to secure a lease from a hyperscale tenant like Amazon, Microsoft, or Google before beginning construction.
A New Era of Risk Assessment
While data centers backed by major tech companies have traditionally been seen as safe bets, the complex financing behind the AI boom is creating new layers of risk. Investors are now looking beyond the primary tenant to assess the creditworthiness of their clients, such as AI startups that are not yet profitable but require massive capital.
However, Sternlicht voiced a significant concern about the creditworthiness of some tenants, particularly those whose business models are heavily reliant on AI startups. He specifically mentioned Oracle's deals tied to ChatGPT, describing it as “a startup that doesn’t make money and requires hundreds of billions of dollars to grow.”
“There’s no question AI is going to change the entire world and do it much faster than anything we’ve ever seen before... That is terrifying to me.” - Barry Sternlicht, CEO of Starwood Capital Group
Wallace echoed this cautious sentiment, questioning the fundamental economics of the AI infrastructure boom. He pointed out the staggering amount of capital required to build and operate the necessary data centers. “My fear is that it might be like 120% of U.S. GDP,” Wallace said, referring to the revenue AI models would need to generate to justify the current level of investment in compute power.
The Human Cost of AI
Beyond the financial implications, Sternlicht expressed deep concern about the societal impact of AI on employment. He described the potential for job displacement as “terrifying for the people.” He shared his own analysis of how AI could streamline operations within his firm, illustrating the stark reality facing many industries.
“I look at … how we spend money, and what I can do with AI agents that I do with humans today,” he said. “Jobs of 15 people can be done with a chatbot that costs me $36 a month.”
Shifting Investment Horizons: Europe and New York
In the current climate, Sternlicht sees more attractive opportunities outside of the United States. “We’re heavily investing in Europe, actually. Not here,” he stated. He cited several factors making Europe an appealing market right now:
- Implementation of stimulus packages
- Lower interest rates
- Absence of significant inflation
- No exposure to U.S.-imposed tariffs
“It’s amazing, having returned from Europe and the Middle East, I can buy everything cheaper in Europe than I can here now,” Sternlicht added, highlighting the current value proposition across the Atlantic.
A Contrarian Bet on NYC
Despite current challenges and political shifts, some long-term investors see immense value in major U.S. urban centers. Brendan Wallace believes the long-term trajectory for New York City remains strong, suggesting that current pessimism may be short-sighted.
Conversely, Wallace made a strong case for a long-term bet on New York City. He argued against overestimating the permanence of “political vibe shifts,” suggesting that the city's fundamental value will endure over time. He believes political trends are dialectical and often swing back.
“Over the long term, New York is going to be super valuable,” Wallace asserted. “So if I were a betting person, I didn’t have to make a return in the next four years, I would bet on New York.” This contrarian view suggests that for patient capital, today’s uncertainty in major American cities could present a significant buying opportunity.
