Company Defaults on $212 Million Loan After CEO Warns of Economic 'Suicide'

Starwood Capital Group Chairman and CEO Barry Sternlicht warned in November about the adverse effect that Federal Reserve interest rate hikes would have on the U.S. economy.

Eight months later, his prediction came true as his company defaulted on a $212.5 million mortgage backed by an Atlanta office tower when the loan matured on July 9.

Acquiring a loan has grown progressively more expensive as the Federal Reserve raises interest rates to combat inflation. Last month was the first time in the past 15 months that the Federal Reserve didn't increase its key interest rate. The respite could be short-lived as at least two more increases are expected before the end of the year, according to the Fed Chair Jerome Powell.

The higher interest rates have made housing purchases even more difficult amid a competitive market. Average rates are on the verge of 7 percent, nearly 4 percent higher than the average mortgage rate in January 2022. Borrowers also are struggling to repay their loans in the corporate world as they battle high rates.

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

The report said that the lenders have hired legal counsel and are negotiating an agreement.

Newsweek reached out to Starwood Capital Group by email for comment.

Sternlicht predicted that the commercial real estate sector would struggle when he took part in an interview with CNBC. He criticized the Fed's strategy to combat inflation by hiking interest rates.

"It's not sustainable," he said. "What they want to do is clearly suicide."

Sternlicht predicted that the negative impact of the rate hikes would be delayed, preceded by companies diminishing their 2023 budgets amid worries of a recession.

Economists are warning of a commercial real estate collapse as values for office, retail and apartment buildings have plummeted by 11 percent and could drop as much as 40 percent, according to Nick Gerli, CEO of Reventure Consulting, which analyzes real estate data.

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

In Atlanta, Tower Place 100 was only 62 percent leased at the end of 2022, according to the report. In 2018, when the loan originated, the office tower was 87 percent leased.

Not only are landlords battling open space, but loan financing costs have skyrocketed as the Fed continued to hike rates.

"It's going to slow the economy," Sternlicht said in November. "It cannot do anything other than that."