Starwood Capital's Sternlicht, Blackstone's Gray tee off on Starwood, overseas investment

NEW YORK—Jonathan Gray, global head of real estate of Blackstone Group. Barry Sternlicht, chairman and CEO of Starwood Capital Group. Two titans of real estate took to the stage at the NYU International Hospitality Industry Investment Conference. Both survived, of course, but not before leaving their mark.

One of the questions dogging most who took to the stage at this year's conference centered on what will become of Starwood Hotels & Resorts Worldwide after it publicly said it was looking at strategic alternatives, including a possible sale of the company. Perhaps there was no one better to have a crack at it than Sternlicht, the past CEO of the company.

He was not timid.


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"It's unclear what will happen," he said. "The stock trades pretty well. I don’t see private equity taking the risk. Will sovereign wealth take it down? These [companies] don’t come up for sale often."

Then he got pointed, first alluding to Starwood's speciality-select brand. "My version of Aloft was different than the product that came out," Sternlicht, who created the W brand, said. One of Starwood's critiques has been its slow growth in the midscale segment, dominated by the likes of Marriott and Hilton. 

On the departure of former CEO Frits van Paasschen, Sternlicht said, "[Starwood] was fixated on fixing technology. They spent more on the back of the house and were less consumer fronting. The flexibility of working with owners changed. I’d say Starwood fell a little behind."

"What the board did was logical," Gray said. "Starwood has great high-end brands, but lacking in select-service area. Does acquring someone who does that make sense?"

Supply and Select Service
Meanwhile, Gray was bullish on the overall state of the industry, due in part because of its languid supply growth up to now. "If you go back to 2006, year-to-date, new supply is running about 1 percent. It takes a while for new supply to come on line. For anyone invested, there are favorable fundamentals for the next couple years," he said, though cautioning new supply being generated in the likes of New York and Miami. "When there is new supply, we get cautious," he added.

Sternlicht called it the "Goldilocks economy": not too hot, not too soft. "Banks are still not lending," he said, "with the exception of EB-5," which he said is oftentimes "needed for stuff that shouldn’t be built." Valuations are getting extreme, he added.

"Demand growth is ok," he went on. "There are pockets of new supply. Cap rates have compressed especially for limited service. Be cautious where you buy," he told the audience. "Cap rates will stop falling."

Overall, Sternlicht called the economy good. "It's stronger than the numbers suggest. Today’s a good time to be public. Debt is cheap," he said.

One of the bigger takeaways was the continued rosy outlook for the select-service segment. "Outside a handful of cities, running full-service hotels in the traditional way is increasingly difficult," Gray said. "The move is toward select service in large way," or what he called full-service light, like Hilton's DoubleTree brand. "Full service is not growing the same way. The core Hilton brand has grown 25 percent; Hilton Garden Inn much more like 225 percent. The major change is the move toward less service: a good clean room, not a lot of interaction—a push toward select service. This is the megatrend."

China is Coming
Another megatrend? China investment, of course. "We are in the early days from investment from China," Gray said. "It’s logical for them to look around the world for investment."

China's Anbang Insurance paid around $1,300 per foot for the Waldorf Astoria in New York, Gray said. "There is real upside there. A great thing for the city and a nice return."

Sternlicht agreed with Gray on the China point. "They have the reason to diversify and the first stop is our major cities," he said. "Guys who have the money only want to buy the best stuff."