Revenge of the
Hotel King
Condé Nast Portfolio
October 2007 issue
By Daniel Roth
Barry Sternlicht’s chauffeur-driven black G.M.C. Yukon rolls up to a
crumbling brick building on the wrong side of the Stamford,
Connecticut, train tracks. It’s a warm fall morning, and a nearby field
of dumpsters casts a rank smell over the block. The site was a heavily
used auditorium and dental clinic for workers at the Yale & Towne
lock factory. When the plant closed in the late 1950s, the building
started its inexorable decline: The windows are blacked out or broken;
the front-door frame is stripped and exposed; inside, wires hang from
where lighting fixtures have been ripped down. But for the next few
months, this littered wreck is going to be the unlikeliest launching
point for the greatest second act in American real estate.
Sternlicht is the 46-year-old founder, former C.E.O., and ex-chairman of Starwood Hotels. Just two years ago, he was the most influential person in the hotel world, commanding one of the industry’s largest operations: 733 hotels, 231,000 rooms, 120,000 employees and more than $5 billion in revenue. Starting with a small, nearly bankrupt real estate investment trust he bought in the mid-1990s for $120 million, Sternlicht gobbled up name brands like Sheraton and Westin; dreamed up a new chain, the W, that appealed to the young, Kenneth Cole-wearing executive class; and transformed the St. Regis from a stand-alone hotel in New York into a worldwide luxury chain.
He was the thirtysomething fireball of the hotel business, revolutionizing the industry and stealing customers and glory from slow-moving giants like Marriott and Hilton. In the process, he created countless enemies outside the firm by openly mocking his competitors’ conservative ways and, internally, by ignoring veterans’ opinions and relentlessly hounding his senior executives.<
“In the hotel industry, he embarrassed a lot of people,” says Ted Darnall, chief operating officer of HEI Hotels & Resorts and former head of Starwood’s North American operations. “He had the vision and strategy that the so-called experts didn’t see or said wouldn’t work. And very little of Barry’s vision was wrong. That’s going to result in a lot of people wanting to see him fail.”
As the operation grew into an empire, Sternlicht became restless, mired in the day-to-day management that took him away from the giant deals he loved to make. He tried to hand off the grinding details of the company to a new C.E.O. and move into an executive-chairman role, only to find himself fighting endlessly and publicly with his successor. In 2005, at Starwood’s annual meeting, he stepped up to the microphone and, with no real explanation, announced, “It is now time for me to follow through with my other commitments to my family and other business.”
In leaving, he joined a long line of founding entrepreneurs who have discovered that their companies no longer need their services. They usually choose one of two paths: move to the sidelines, hoping to rejoin the company later, Steve Jobs-style, as savior in chief; or, like Home Depot’s Bernie Marcus, leave without looking back, to devote themselves to family or philanthropy.
Then there is the Sternlicht way: Walk away from the company with the determination to come back and beat it. Although he had plenty of other opportunities to pursue, Sternlicht couldn’t live with the idea that his departure marked him as a failure. In fact, throughout his entire professional life—even as he achieved success after success—he has always been his own toughest critic, driven by a family history that he revealed only after I’d been following him for nearly a year. “A psychoanalyst would have a lot of fun with me,” he admits.
Stepping from the S.U.V., Sternlicht moves quickly up the Yale & Towne building’s dark central stairway and pushes open an intricately carved, ebony-stained walnut door. Inside lies a 1,000-square-foot one-bedroom suite, a perfect mock-up—down to the black river rocks in the exposed-air shower—of a room for a Wailea, Hawaii, resort that goes under construction this winter.
As soon as Sternlicht enters the prototype, he becomes the center of attention. Tall and bald, his shirt unbuttoned to mid-sternum, as usual, he glides through the rooms—until something stops him cold. “Why is that outlet there?” he demands, pointing halfway down a wall just inside the kitchen. The chatter ends abruptly. “What is the point of that? What could you possibly plug in there?” Suddenly the room fills with activity: Designers who have spent five months putting this together try to distance themselves from what could have only been the work of a lunatic.
Soon Sternlicht is dismantling everything in sight. “Appliances! Where do we plug in our blenders?” he asks, plopping down on a stool (too short and lacking swivel) at an off-white kitchen counter (too narrow). “What is that, a wall-mounted phone? We should put the phone on the island, a handheld cordless. Napkins. Napkins and towel drawers. Where are the dishrags going to go? Where do you put your cooking utensils? People have stuff, and this will look really crappy cluttered up. This is a dumb place to make mistakes.”
The difference this time is that his competitors are copying his every move. In early summer, Marriott partnered with boutique-hotel pioneer Ian Schrager to launch a line of about 100 W-like hotels, and just about every hotel company is declaring itself green. Sternlicht also lacks the resources of Starwood, with its $12.4 billion market cap, let alone those of other giants such as the Four Seasons—owned by a consortium that includes Bill Gates and Saudi prince Alwaleed bin Talal bin Abdul Aziz al-Saud—and Hilton Hotels, which is being purchased by the Blackstone Group for $26 billion. Sternlicht is financing his new empire with debt and $3 billion raised over the past two years by his real estate private equity firm, Starwood Capital (which, despite the name, has no ties to the hotel company).
Sternlicht has always been one of the most paranoid people in business. But now, finally, the paranoia seems justified. And so he’s moving with a velocity that boggles the minds of those closest to him. “It’s insecurity—not necessarily in a negative way, but more like, ‘Holy shit, I’m falling behind here,’ ” says Jeff Dishner, Starwood Capital’s chief operating officer and an associate of Sternlicht’s for 16 years. “I thought when he was stepping down from Starwood Hotels, he’d want to slow things down. But he went in absolutely the opposite direction and accelerated. I’d probably say he’s more insatiable than he ever was.”
The most common description I heard about Sternlicht in the months I spent watching him construct his new hotel kingdom is that he uses both sides of his brain, moving seamlessly between building spreadsheets and evaluating bedsheets. “Barry is one of the few guys in private equity who understand brand value,” says Hamilton South, the former chief marketing officer of Polo Ralph Lauren, who now runs a marketing and consulting firm. “Most of them look at what something is worth based on the math. Barry can do that but also say ‘The math isn’t great, but this is a phenomenal brand. We’ll figure the math out.’ ”
Connecting these two hemispheres is a corpus callosum that seems to pulse with signals of being wronged; neither side feels it’s getting the proper respect. In Starwood’s early days, people didn’t believe Sternlicht could develop the cobbled-together brands, dismissing him as a deal guy. It drove him crazy. He was creative; he was an artist. Would a Wall Street guy ever have thought to brand a hotel mattress, as Sternlicht did with Westin’s Heavenly Bed? Then, as he became better known for his innovations, people doubted that he had the capacity to guide a company through the 2001 recession. “I mean,” he complained to me, “the papers were saying, ‘Can he manage through 9/11?’ You know, ‘This will prove his ability.’ But they didn’t say that I had done it after Starwood came out fine.”
With this latest venture, he’s melding the two sides right from the start and taking credit for every step of the process. The 1 is intended to be a sort of W with a conscience: “I was looking for something that would give us a soul,” Sternlicht says. “The W was for me when I was 35, and this is for me when I’m 45.” While Sternlicht owns a Lexus hybrid, he doesn’t exactly glow green. In addition to the Yukon, he gets around by Land Rover (“the cheap one,” he notes. “It gets great gas mileage”), a Mercedes AMG, and a Gulfstream IV. But he sees a growing market for urban green travel and is finding prime spots in city centers, creating a distinctive hotel for each. In Washington, he recently bought the Nigerian embassy, across the street from the Ritz-Carlton, for $15.5 million and plans to build something that Mies van der Rohe might have crafted if he’d been asked to draft a Biosphere 3 for Princeton’s campus: Ivy will cloak much of the first floor and creep up the side of an airy glass-and-steel structure; a hanging garden will appear to cleave the hotel.
When Miami architect Chad Oppenheim first presented his design for the Washington 1, it resembled a copper-coated radiator. Sternlicht’s people groaned at Oppenheim’s presentation, but the boss told the group he saw something in the plans: “Give me four days, and if I can’t make this work, you can pick someone else.” Then he laid out his vision to Oppenheim. The architect says Sternlicht’s input, while invaluable, really just helped him return to some of his initial ideas. But Sternlicht doesn’t quite see it that way and keeps telling me so. “I literally told Chad what we wanted to do,” he says.
The other brands Sternlicht is developing came to him through the $3.2 billion purchase of Groupe Taittinger and Société du Louvre that he engineered shortly after leaving Starwood. The French firms controlled, among other luxury properties, the crystal company Baccarat (and practically the entire French town it uses as a base); Taittinger Champagne; and chic fragrance line Annick Goutal.
Sternlicht intends to convert the building into an all-suites hotel and has hired French architect Thierry Despont for the redesign. He says he could flip the property and make a huge return for his investors, mainly large pension funds and wealthy families. But he thinks he can do even better by spreading the Crillon name, creating a line of hotels that will immediately become the most expensive in any market. He’s already picked out historic buildings for Crillons in New York and Moscow and is looking for a site in Shanghai. As for marketing the new chain, he says it won’t need much: “Those who know, know.”
For those who know a little less, Sternlicht is launching a line of properties under the Baccarat name. The first few sites will be resorts, including one on Water Cay, in the Turks and Caicos Islands, that will look as if it had been transported from the South Pacific, with over-the-water bungalows, a dramatic lobby set near a man-made river, and an assortment of multimillion-dollar, ocean-view condos. But Sternlicht expects more out of the brand. Glancing down at the blue-faced Montblanc watch on his wrist, he says he will follow the penmaker’s strategy of offering a broad line of luxury goods—ties, watches, custom-made glassware—at Baccarat stores and hotels. “We have to make Baccarat a status symbol,” he says. “People in Dubai and Saudi Arabia and Russia and France know Baccarat. It’s a little brand with a huge name—a huge name.”
Sternlicht has limited time to roll all this out. Unlike his Starwood Hotels investors, Starwood Capital’s expect a full payout in the next six to eight years. For now, the window for oversize returns on luxury properties still appears to be wide open. In the past year, the prices for high-end hotel rooms rose faster than those in any other sector of the lodging industry, with a typical room going for $300, about three times the average room rate. Ultra-luxury hotels are increasingly being sought by wealthy American baby boomers and their global counterparts; they’re not happy sticking to pleasant-but-familiar standbys like the Four Seasons or the Ritz-Carlton.
“We were in the era of cookie-cutter hotels before Sternlicht,” says Lalia Rach, divisional dean of New York University’s hospitality school. “And when you think about upscale hotels, they’re very similar. I think there is some great excitement about his newest venture: Will he bring that magic to bear again?”
With competitors watching intently, it would probably be best for Sternlicht to show his hand only at the last minute. He knows that but can’t resist the temptation to prove he has a plan. “I didn’t want to talk about the W until we had 10 open,” he says. “But it got to the point where people were criticizing us, and me, and saying it would be ‘Barry’s folly.’ I seem always to have my credibility in doubt. Here it will be the same thing.”
The latest collection of brands is like a trophy wife to Sternlicht: younger, sexier, able to show up the original spouse should both end up on the same block. And not surprisingly, the Starwood founder finds himself thinking a lot about his time at his first hotel company: He still uses possessive pronouns when talking about the W, and he grows morose reminiscing about his last days at the firm. In late 2003, Sternlicht decided he was done running day-to-day operations. He told Starwood’s board that he’d like to be executive chairman and explained how easy his successor would have it, thanks to the path he had laid. “Elmer Fudd could run the company” was how he put it. Sternlicht’s employment contract, rewritten by the board in 2003, emphasized that he would “consult with the new C.E.O. in all important matters concerning the interests and management of the company.”
Starwood’s hire, former Coca-Cola president Steven Heyer, wasn’t so willing to share the spotlight; he set out to make Starwood his own. Some of Sternlicht’s people sensed the chill immediately. Clint Phillips, a personal trainer and chiropractor whom Sternlicht helped by letting him set up a back clinic at the St. Regis in Aspen, says he tried fruitlessly to reach Heyer to discuss expanding into other Starwood-owned locations. When Heyer stayed at the Aspen hotel, Phillips even slipped a note under his door. It was never answered. Heyer drastically scaled back one of Sternlicht’s mandatory rituals: a weekly review of every new design—from rug to lobby desk—being planned for each brand. He also killed off a Sternlicht scheme to build a chain of hotels intended to be a more upscale version of the W.
From the beginning, the company employed a consultant to act as a marriage counselor for Heyer and Sternlicht. It didn’t help. Sternlicht went to the board in late 2005 with an ultimatum: Either he goes or I go. Sternlicht offered to pay Heyer’s severance with his own $11.8 million package. Before the directors would consider getting rid of Heyer, they wanted to know if Sternlicht would take his job back. But Sternlicht wouldn’t commit. He was already thinking about what he could do at Starwood Capital, and he told Interior Design magazine that he envisioned returning to painting and sculpting, once his passion, at a studio he’d set up at his Nantucket beach house.
Today, that hideaway has hardly been touched: An easel overlooking Nantucket Sound sits empty, and a carousel big enough for a portfolio’s worth of supplies holds just eight nearly new brushes. There’s no time for art when there’s another real estate empire to build.
“You kick me, and I get challenged,” Sternlicht says. “It’s probably why I’m still working here. You know, I just wanted to do it again. The more you kick me, the more determined I get. I must get that from my dad.”
Only after I’ve spent a year sitting through meetings and traveling with Sternlicht is he finally ready to talk about his childhood. We’re having lunch at a nondescript restaurant just off the campus of Brown University, where he’s attending his 25th reunion. I’ve asked everyone who’s worked with Sternlicht what makes him so driven, and no one has been able to answer the question. Now, Sternlicht tells me, it all goes back to the story of his father.
Maurycy Sternlicht was a nine-year-old boy in Kraków, Poland, when the Nazis invaded in 1939. His father, away on a business trip, was captured by the Russians. Maurycy fled, along with his sister, mother, and grandmother, into the mountains of Czechoslovakia, where they scrounged an existence until the end of the war. Maurycy became an engineer, changed his name to Mark, and emigrated to America. There he married Harriet, a native New Yorker.
The couple had three sons. Barry, the middle child, says his father was a distant figure who worked long hours and spent weekends on his hobby: tinkering with car engines. “All he lived for was cars,” Sternlicht says. “I guess he never really felt that comfortable here. But nobody can imagine what he went through.” Sternlicht’s mother was a gregarious painter and biology teacher who eventually put her networking skills to use as a stockbroker. Sternlicht didn’t stand out much while he was growing up, choosing activities in high school like the drama club, where, instead of acting, he oversaw props and publicity. “A nice kid, a good kid, but he never really sparkled,” says Wes Hobby, his high-school drama teacher.
While attending Brown in the early 1980s, Sternlicht experienced two things that would kindle his ambition. The first, again, involved his father. The elder Sternlicht had opened a plant in the 1970s that produced batteries and disposable flashlights for a French company. As his firm grew, he was asked to speak about small-business issues and sit on government panels. But, says his son, the operation began to suffer from lack of attention. When the parent company ran into trouble, it liquidated the factory. His father didn’t have an ownership stake and was forced to start over. “I think it really hurt my dad,” Sternlicht says. It also sparked a sense of paranoia in the son. Sternlicht began reading incessantly, a habit he still practices: “I read out of fear. I read because I think I’m going to read something that tells me the reason I’m holding that asset is no longer valid, or that I’ve got to sell that today because I don’t want to wind up like my dad’s business.”
Just as his dad’s enterprise was failing, Sternlicht glimpsed the other side of the business universe. While visiting his college roommate’s family in the Hamptons, he watched a peacock strolling on the grounds of one of the mansions. He was stunned. How wealthy, how successful do you have to be in order to have your own peacock? Whatever it took, that’s what he wanted, and he wore his desire on his sleeve. In his last speech as C.E.O. of Starwood Hotels, Sternlicht told 2,200 managers, workers, and executives that although Starwood was succeeding, it couldn’t afford to give an inch: “The peacock is headed to our lawn, but our worthy adversaries are, even as we speak, and at their own snail’s pace, getting new peacock food!”
Sternlicht eventually earned an M.B.A. from Harvard and joined Chicago-based JMB Realty, then one of the hottest property investors in the country. He became a nonstop dealmaker, helping to steer billions of dollars’ worth of purchases for the firm before he turned 30. Soon after a London buyout he was working on proved disastrous, his firm began downsizing and Sternlicht was fired. “I went from the wunderkind to being out the door,” he says. “I never wanted to get fired again. It was not a pleasant experience.”
Sternlicht decided the answer was to work even harder. A friend who handled money for the ultrawealthy Burden and Ziff families offered to back Sternlicht with $20 million if he started his own investment firm. Others joined in, and in 1992, Sternlicht launched Starwood Capital with $52 million. His goal was to buy up properties that were being auctioned off in the government’s bailout of the savings and loan industry. In 1993, Sternlicht sold the portfolio to real estate magnate Sam Zell for more than 20 percent of Zell’s Equity Residential Properties Trust. When Zell took the company public that year, Starwood saw a 100 percent return.
Anyone peeking into the Starwood offices then would have sworn he was looking at a boiler room. Sternlicht expected his handful of employees to work 15 hours a day, seven days a week, first from Chicago and then from a run-down hotel in Stamford, in a room furnished with a fax machine and a pile of yet-to-be-unpacked boxes. “Everything was about the deal and getting the deal done,” recalls Jerry Silvey, Starwood Capital’s chief financial officer.
When Sternlicht decided that hotels were an undervalued opportunity, he seized on the idea of buying Hotel Investors Trust. The publicly traded company was one of four “paired-share” REITs: real estate investment trusts that were allowed to both own and manage properties, with a tax structure that enabled Sternlicht to do deals that rivals might have had a hard time justifying. Sternlicht quickly put his advantage to use: In 1997, he bought the privately held Westin for $1.6 billion. While still closing the Westin deal, he swooped in as the white knight during Hilton’s attempted takeover of the massive conglomerate ITT, which owned Sheraton. After a weeks-long battle, Sternlicht picked up ITT for $14.6 billion, much of it financed with junk-rated debt. Suddenly, Sternlicht’s little tax play had turned into one of the largest hotel companies in the world.
That same year, he went to the board and asked for $5 million to start what would become the W chain. (His wife, Mimi, a onetime advertising copywriter, helped come up with the name.) At the time, there was very little differentiation between upscale hotel companies. Sternlicht liked to say that you had to go outside and look at the nameplate on the hotel to see where you were staying. He insisted that travelers would pay to stay somewhere unique. Sternlicht told his team that he wanted better beds—big, rich beds—better pillows, and better TVs than his competitors. And he wanted the rooms to cost as little to build at the W as they did at the Westin. Ted Darnall, whom Sternlicht had picked to oversee the venture, told him the whole thing was impossible. Others in the company pulled Darnall aside and told him it was going to be Sternlicht’s downfall. “There were people—old-line hotel people from ITT and Westin—who were rooting for him to fail,” says Darnall.
“Barry would probably say that was his cross to bear,” says Kemper Hyers, who oversaw design for Sheraton and later, Le Meridien, a brand purchased by Starwood Hotels in 2005. In early 2007, Hyers left the hotel chain, and recently he began working with Starwood Capital. “But, in truth, I think he loved to prove everyone wrong and be the wunderkind again and again—deservedly so.”
Trying to figure out where to cut costs, Darnall and his team began focusing on an $800 armoire. Axing it could bring instant savings, but a prominent travel-rating company had mandated that any room hoping for four stars had to have one. Sternlicht said he didn’t care: He ditched the armoire and still got the rating.
As the company grew, Sternlicht realized he needed professional management. He’d never run anything of this size, so in 1998 he tapped Richard Nanula, an old friend from Harvard Business School and a rising star at Disney, to be C.E.O. Nanula was handsome and media-savvy, and almost immediately the two were at odds. Sternlicht says Nanula refused to meet with investors, even as Starwood’s stock tanked following an Asian financial crunch and a congressional decision to outlaw the tax advantage of the paired-share REIT structure that gave Starwood an edge.
The press started picking up on the tension, and Sternlicht got most of the blame. In the spring of 1999, as Nanula was being pushed out, one magazine went so far as to say Sternlicht was suffering from “plain old envy.”
“I couldn’t believe it,” says Sternlicht. “Our agreement was he was going to leave quietly.” He says that Nanula told him, “I learned P.R. from [Michael] Eisner, [Michael] Ovitz, and [Jeffrey] Katzenberg. You don’t know anything about P.R.”
After Nanula left, others followed. By the end of 1999, Sternlicht had become known as the hostile hotelier, a man who couldn’t get along with anyone. “Personally, 10 years and many successes later, it still hurts me,” he says. When, half a decade later, the stories started again—this time as Sternlicht and Heyer went at it—it was like a bad dream. “I was battling a press image the whole time,” he says.
It doesn’t seem to lift Sternlicht’s spirits that his onetime foes have nearly disappeared from business. In April, Nanula announced he was resigning as chief financial officer of drugmaker Amgen, making the statement shortly after the company was accused of not telling investors about negative findings in key drug trials. A week earlier, Heyer had left Starwood Hotels after the board received an anonymous letter stating that he had created a hostile work environment. As the directors probed, they reportedly found questionable emails between the married Heyer and a female employee. He left without his $35 million severance—let alone the $11.8 million Sternlicht had once offered him.
One afternoon this spring, I wait for Sternlicht in the reception area of his squat, white-marble headquarters in Greenwich, Connecticut. When he steps out of the elevator, he gives a quick greeting, then pauses to look at the entryway’s coffee table and black leather couch. “This is all wrong,” he says. “The proportion is all wrong here—the couch, the carpet . . . ” He seems let down. I ask if he’s going to talk to the owner. “We are the owner,” he says.
Ever since returning to Starwood Capital, Sternlicht has been driving his 144 employees hard. He wants his group, of which he’s the majority owner, to rival top private equity and hedge funds. Shortly after Sternlicht stepped down as C.E.O. of the hotel company, private equity investor Eddie Lampert showed up on the cover of BusinessWeek as the “next Warren Buffett” for his purchases of Kmart and Sears. Sternlicht handed the issue to his staff and demanded to know why Lampert’s mug was there. “We could have bought Sears. Why didn’t we buy Sears?” he asked, according to an employee. “How did we not see that?” Sternlicht doesn’t recall the conversation but admits, “That’s the kind of thing I challenge our guys to do.” He pauses. “And, you know, I wish they did more of it.”
His lieutenants at Starwood Capital have gotten used to Sternlicht’s obsessiveness. The top six have been with him for more than a decade, an unusually long time in this business. “Everybody loves Barry,” Jerry Silvey says. “Not necessarily every day, because he can be pretty damn tough.”
While the boss was off building Starwood Hotels, the Starwood Capital group was buying properties such as undervalued office buildings in Seattle and apartment communities in Phoenix. The deals were conservative, the funds small. Sternlicht put a stop to that.
In April 2005, he was tipped off to the possibility of buying out the Taittinger family, which partly owned Crillon’s parent company, Société du Louvre. Anne-Claire Taittinger, the head of the family, was looking for a way to cash out, as was S.D.L.’s other major investor, Albert Frère. Sternlicht dispatched a dozen Starwood Capital employees to Paris and installed them in a Sofitel across from the Crillon. For two and a half weeks, the team lived there, working 20-hour days, trying to cobble together a bid. Besides the usual guesswork involving taxes, pensions, and overhead attendant on any big deal, there was the language barrier. The Starwood team had to have every incoming document translated into English and their responses into French. Then there was the cultural divide: How would the French handle an American firm’s owning one of the biggest names in champagne? After a few tense conversations, and Sternlicht’s assurance that he would try to sell Taittinger to a French firm, S.D.L.’s major shareholders accepted Starwood’s bid. Dishner and Silvey, the C.O.O. and C.F.O., cracked open a bottle of Taittinger.
The deal closed on a Thursday. The following Monday, Sternlicht convened his weekly 9 a.m. meeting, in which everyone is expected to comment on projects in the pipeline. To his employees’ shock, Sternlicht began grilling each of them on what was coming up next. “We’ve just bought the biggest thing we’ve ever bought by orders of magnitude,” says Dishner. “And it just doesn’t matter: We’re right back into it.”
Sternlicht doesn’t apologize for anything. He can’t slow down and can’t understand why anyone would want to. In his view, there’s always someone out there who will pounce if you begin to slack. “You know, I get criticized that I don’t celebrate our successes, even today. My guys say I don’t celebrate enough. Maybe it’s my dad’s business, but you know, it’s like a shark. You stop, you die. Right? You die.”
