Major commercial real estate lender cites slow recovery in Downtown LA while reporting record origination volumes
Starwood Property Trust Inc. (NYSE: STWD) delivered mixed second-quarter results that highlighted both the resilience of its diversified lending platform and the persistent challenges facing certain urban markets, particularly Downtown Los Angeles, where the company acknowledged slower-than-expected progress on problem assets.
The commercial real estate finance giant reported distributable earnings of $0.43 per share, beating analyst estimates by $0.05, while revenue of $444.28 million fell short of expectations. Despite the revenue miss, Starwood maintained its quarterly dividend of $0.48 per share for the 47th consecutive quarter, making it the only mortgage REIT to never cut its dividend.
During the earnings call, President Jeff DiModica candidly addressed the company’s challenges in the Los Angeles market, particularly in the downtown core. “There are a couple of things in Downtown L.A., and Downtown L.A. is just not moving forward as quickly as possible. So we’re looking at other potential options on those,” DiModica said when discussing the company’s timeline for resolving problem assets.
The comments reflect broader struggles facing Downtown Los Angeles’ commercial real estate market, which has been grappling with elevated vacancy rates, reduced foot traffic, and economic uncertainty. For Starwood, which manages approximately $1.7 billion to $1.8 billion in nonaccrual assets, the slow recovery in certain urban cores represents a key challenge in its asset resolution strategy.
DiModica outlined the company’s patient approach to these challenging markets, explaining that management has developed a three-year plan to work through problem assets. “We had a plan that we would try to be half out of it by the end of ’26 and then half again of that by the end of ’27, which would be only 1/4 of that book,” he said.
The Los Angeles market also came up in discussions about hotel investments, with CEO Barry Sternlicht drawing parallels between labor challenges in different major cities. When discussing hotel market dynamics, Sternlicht noted potential headwinds from union negotiations, referencing recent developments on the West Coast. “New York City contracts coming up in May of next year, it’s going to look something like what happened in L.A.,” he said, suggesting that labor costs could pressure hotel operations across major metropolitan areas.
Despite the Los Angeles headwinds, Starwood reported robust business activity elsewhere, with record-setting origination volumes of $5.5 billion in the first half of 2025, already surpassing all of 2024. The company originated $1.9 billion in commercial loans during the second quarter alone.
The company’s diversification strategy appeared to pay dividends, with commercial real estate loans now representing just 52 percent of balance sheet assets, down from 65 percent in 2022. This shift was highlighted by Starwood’s $2.2 billion acquisition of Fundamental Income, a net lease real estate platform with 467 properties across the country.
Looking ahead, Starwood executives expressed optimism about improving market conditions as interest rates decline. DiModica noted that forward rate expectations show SOFR potentially falling to 3 percent by the first quarter of 2027, which could benefit both new lending opportunities and the resolution of existing problem assets.
“If the forward curve is right and we head towards 3 percent [SOFR], my gut is that the industry is likely overreserved,” DiModica said, suggesting that lower rates could improve outcomes for distressed assets, potentially including those in challenging markets like Downtown Los Angeles.
However, the company maintains a cautious approach to asset disposition. “We’re not going to rush,” DiModica explained. “Rushing would cause you [to] go from our 9.5 percent cost of capital, you sell something to an opportunistic fund and they have a 20 percent cost of capital, and then they bid it back for any downside that could happen, and that’s not necessarily the best outcome.”
For Starwood, the Los Angeles situation exemplifies the broader challenges facing commercial real estate lenders in certain urban markets, even as the company continues to demonstrate the strength of its diversified platform and patient capital approach. With $110 billion in assets under management through its parent company Starwood Capital Group, the firm appears well-positioned to weather regional headwinds while capitalizing on improving market conditions elsewhere.
