Barry Sternlicht says he will drop employees in favor of AI
A version of this article first appeared in the CNBC Property Play newsletter with Diana Olick. Property Play covers new and emerging opportunities for real estate investors, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large public companies. become a member to receive future editions straight to your inbox.
Billionaire Barry Sternlicht, chairman and CEO of Starwood Capital Group, is a legendary former real estate investor. Brendan Wallace is an entrepreneur who co-founded Fifth Wall, a venture capital firm that invests in real estate technology and decarbonises real estate. The two first met at the gym. Now Wallace can say that Sternlicht is both a mentor and Fifth Wall investor, and Sternlicht jokes that Wallace is his trainer.
Together, they gave CNBC Property Play a rare insight into how old-school commercial real estate investing is evolving into a new technology-driven world order, and how this new world order still relies on lessons learned in the past.
Here are some highlights from the conversation, edited for clarity and length:
About CRE investing
Ass: We endured a 500 basis point increase in rates, which was a pretty rapid increase, and even though real estate returns rose or were not properly hedged, most people invested in had to pay some price for that. Your costs have increased, your expenses have increased, and these have resulted in a lot of cash flow being drained from assets that could have been spent on repairing the assets. This is now behind us and there is no doubt that interest rates will fall. … Jerome in May of next year [Powell] will be outside [as Federal Reserve Chairman]and no one will get this job without agreeing to lower rates.
I think they should lower interest rates. I think the inflation we are seeing is related to tariffs. It will continue. The situation is likely to worsen in the fourth quarter, when new stocks hit the shelves and tariffs can no longer be ignored.
-Wallace: The rate hikes that Barry was talking about have, by definition, impacted support technology, because all the technology companies, all the loss-making businesses, were re-rated at the same time. At the same time, demand for commercial real estate also stagnated.
Additionally, I would say that a big part of where real estate companies have invested in the last four years has been decarbonization efforts, so trying to comply with new carbon neutrality laws and anticipating that kind of wave of decarbonization. And that’s how I feel too [President Donald] Trump’s election made it feel like they had a pass for four years.
Artificial intelligence and data centers
Ass: We probably have $20 billion allocated [the data center] space. I think it’s a different issue than you think. Most of us don’t build until we get a hyperscaler lease. So we get rent from Amazon, Microsoft, Google, Oracle. What we’re monitoring right now is the creditworthiness of the tenant, and Oracle in particular, because Oracle is executing all of these deals on a back-end. [ChatGPT]Chat, on the other hand, is a startup that cannot make money and needs hundreds of billions of dollars to reach the scale it wants.
There is no doubt that artificial intelligence will change the entire world and will do it much faster than anything we have seen before, much faster than the internet, certainly faster than the Industrial Revolution. This is very scary for me. So I’m not that happy. I look at how we spend money and what I can do with AI agents the things I do with humans today, and it’s terrifying for humans. I think we should let people go, right? The work of 15 people can be done with a chatbot that costs me 36 dollars a month.
-Wallace: I was trying to keep track of all these beautiful Byzantine and somewhat incestuous loyalties that are happening between the big tech companies, between the digital infrastructure providers, and ultimately it’s actually very difficult to keep track of who’s going to pay for these, but ultimately it has to be paid for within the economy.
The way to test whether it makes sense is to look at the amount of AI computing that would be required to populate all the data centers in production or announced to be going into production, and then assume that the tech companies would have to make some profit on top of that to justify it, which they don’t today, but let’s assume they have to do that. Take whatever margin you want and assume the revenue therefore flows into large language models and AI. If you do that math, what percentage of US GDP would that be today? My fear is that this could be as much as 120% of US GDP.
On their next bet
Ass: In fact, we are investing heavily in Europe. Not here. They made the incentive package. They have low rates. They don’t really have inflation. They have no tariffs. Since I came back from Europe and the Middle East, I can buy everything in Europe now cheaper than I can here.
-Wallace: New York City. People exaggerate the permanence of these political weather changes. Within two years of electing Trump, we elected him [Zohran] Mamdani will direct New York, and I think these things are progressing dialectically. New York will be very valuable in the long run. So if I were a betting guy that I wouldn’t have to make a return in the next four years, I would bet on New York.
