Rising Interest Rates and the Challenges Faced by Starwood Property Trust: A Warning For the Real Estate Sector

My dear impertinents, dear impertinents,

Starwood notably manages Starwood Property Trust, the first commercial mortgage real estate investment fund in the United States (more than $72 billion in capital since its inception, for a portfolio of more than $19 billion in debt and equity investments).

When a company like Starwood Property experiences difficulties, you shouldn’t necessarily panic, but you shouldn’t ignore them either because it’s an obvious symptom that the rise in rates is producing its effects, especially on all those who are sensitive… because they are very indebted, which is the case for certain industries and the real estate sector in particular.

It is on these difficulties that the Bloomberg site informs us in this article (source here).

Starwood Capital Group was one of the latest companies to fall victim to rising rates when it failed to refinance or repay its loan when its mortgage on Tower Place 100 in Atlanta, Georgia expired on July 9, according to Bloomberg.

The report says the lenders have hired legal counsel and are in the process of negotiating an agreement.

In Atlanta, the rental vacancy rate in office real estate is 22.4% while in the specific case of Tower Place 100, it was only 62% rented at the end of 2022, according to the report.

Starwood Capital Group is not the first corporate owner to default on its loan. Other businesses are also lacking, primarily for office properties amid weakening demand for space due to the work-from-home surge that has flourished during the COVID-19 pandemic. In February, Brookfield Asset Management defaulted on loans for two office buildings in Los Angeles due to a lack of demand for the space, according to Bloomberg.

Interest rate hikes take time to take effect in the economy. It takes at least 12 to 24 months to see the consequences materialize.

We are just beginning to see the recession looming.

It is already too late, but all is not lost.

Prepare yourselves !

Charles SANNAT

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