A version of this article first appeared in the CNBC Property Play newsletter with Diana Olick. Property Play covers new and evolving opportunities for the real estate investor, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large public companies. Register to receive future editions, straight to your inbox.
Billionaire Barry Sternlicht, Chairman and CEO of Starwood Capital Group, is a legendary and historic real estate investor. Brendan Wallace is an entrepreneur who co-founded Fifth Wall, a venture capital firm investing in real estate technology and real estate decarbonization. The couple first met at the gym. Now, Wallace can say that Sternlicht is a mentor – as well as a Fifth Wall investor – and Sternlicht jokes that Wallace is his coach.
Together, they gave CNBC Property Play a rare glimpse into how old-school commercial real estate investing is moving toward a technology-driven new world order and how that new world order still builds on lessons learned in the past.
Here are some of the highlights from the conversation, edited for clarity and length:
On CRE investment
Rear light: We had a pretty rapid rate increase of 500 basis points, and most investors had to pay some price for that, whether property yields increased or they weren’t properly hedged. Your costs have increased, your expenses have increased and have drained much of the asset cash flow that could have been spent on asset repairs. This is now behind us and there is no doubt that interest rates are falling. …In May next year, Jérôme [Powell] will be released [as Federal Reserve Chairman]and no one gets that job without accepting lower rates.
I think they should lower rates. I think the inflation we’re seeing has to do with tariffs. This will continue. The situation will likely get worse in the fourth quarter, when new inventory hits shelves and tariffs can no longer be ignored.
Wallace: The rate increases that Barry mentioned had an impact on accessory technology because all the technology companies, all the loss-making companies, were all re-rated at the same time. And at the same time, the demand for commercial real estate has stopped.
I would say that in addition to that, a lot of the investment by real estate companies over the last four years has been in decarbonization efforts, so trying to comply with the new carbon neutrality laws… and anticipating that kind of wave of decarbonization. And I feel like I’m with [President Donald] After Trump was elected, it was like they got a free pass, certainly for four years.
On AI and data centers
Rear light: We probably spent $20 billion on [the data center] space. I think this is a different problem than you think. Most of us don’t build until we secure a hyperscaler lease. So we get the lease from Amazon, Microsoft, Google, Oracle. What we’re monitoring now is the creditworthiness of the tenant, and in particular Oracle, because Oracle is doing all of these downstream transactions. [ChatGPT]and Chat is a startup that doesn’t make money and needs hundreds of billions of dollars to reach the scale it wants to achieve.
There is no doubt that AI is going to change the entire world and will do it much faster than anything we have ever seen before, much faster than the Internet, and certainly faster than the industrial revolution. This terrifies me. I mean, I’m not that complacent. I look at… how we spend money and what I can do with AI agents like I do with humans today, and it’s terrifying for people. I think we should let people go, right? Tasks of 15 people can be done with a chatbot that costs me $36 per month.
Wallace: I was trying to trace all of these quite byzantine and somewhat incestuous engagements that are happening between big tech companies, between digital infrastructure providers, and it’s actually very unclear who is ultimately going to pay for all of this, but ultimately it has to be paid for in the economy.
The best way to test whether this makes sense is to look at how much AI computing will be required to fill all the data centers that are in production or that have been announced to go into production, and then assume that tech companies have to make a profit on top of that to justify it, which is not the case today, but let’s assume that they have to. Take whatever margin you want, assume that’s the revenue that then goes to big language models and AI. What percentage of US GDP would that represent today if you did that calculation? I fear this could be 120% of US GDP.
On their next bets
Rear light: In fact, we are investing heavily in Europe. Not here. They implemented the recovery plan. They have low rates. They don’t really have inflation. They don’t have prices. It’s amazing, back from Europe and the Middle East, I can buy everything cheaper in Europe than here now.
Wallace: New York City. People overestimate the durability of these changes in the political atmosphere. Two years after electing Trump, we elected [Zohran] Mamdani to lead New York, and I just think these things evolve dialectically. In the long run, New York is going to be extremely valuable. So if I was a betting man, I wouldn’t have to make a comeback in the next four years, I would bet on New York.