I wrote on Monday about the wave of withdrawals from Blackstone’s BREIT (Blackstone Real Estate Investment Trust). BREIT has focused, in particular, on rental-housing and logistics facilities. BREIT is an unquoted vehicle, and typically redemptions (withdrawals) from that vehicle are capped each month. One reason for that is to avoid, so far as possible, a fund such as BREIT having to make forced asset sales in order to come up with the cash to pay out those who want to redeem. The risk obviously is that forced sales would depress the fund’s asset value lower than it ‘should’ be.
Redemptions from BREIT have now run up against that threshold.
One good rule in the markets is that fear is contagious. Another is that no one wants to be stuck in an investment he can’t exit.
And so, via the Wall Street Journal, today:
Big and small investors are queuing up to pull money out of real-estate funds, the latest sign that the surge in interest rates is threatening to upend the commercial-property sector.
Blackstone Inc. last week said it would limit the amount of money investors could withdraw from its $69 billion flagship real-estate fund following a surge in redemption requests. Starwood Capital Group shortly after notified investors that it was also restricting withdrawals in a $14.6 billion fund, according to a person familiar with the matter.
The Blackstone and Starwood funds are the two largest nontraded real-estate investment trusts, a popular investment structure with wealthy individuals.
Other private real-estate funds in the U.K. targeting institutions managed by companies including BlackRock Inc. and CBRE Investment Management recently took similar steps to stem outflows, according to the companies. Some U.S. pensions are also starting to yank money out of real-estate funds, some advisers to these large investors say.
The rise in cash-out requests comes as more investors and financial firms turn their back on real estate. Rising interest rates are threatening to push down property values in this debt-laden industry. Meanwhile, concerns are growing about weak demand for office space and slowing rent growth in the apartment sector.
Commercial real-estate values “need to come down,” said Joe Gorin, head of U.S. real estate acquisitions at the financial firm Barings, referring especially to office buildings. “The question is by how much.”
The FTSE NAREIT All Equity REITs Index, which tracks publicly traded landlords, is down more than 20% this year, and office owners have seen far steeper declines. Banks are issuing fewer commercial mortgages than last year, brokers say, and the volume of building sales is down as buyers balk at prices no longer in line with a worsening outlook.
Making matters worse:
Real-estate funds typically base their valuations on appraisals that can be slow to adapt to changing markets. That has kept fund valuations high even as the real-estate market has deteriorated. But eventually, reality will catch up.
Part of the problem is that rising rates will (for a number of reasons) tend to knock property values. As is pointed out in the WSJ article, there’s also the simple fact that the return to (somewhat) higher interest rates (lest we forget: real rates are still negative) in liquid tradable assets has diminished the appeal of keeping money in a non-publicly traded REIT (real-estate-investment trust) such as BREIT.
The WSJ:
High interest rates have also made nontraded REITs less appealing to new investors. When rates were low, nontraded REITs were appealing because they offered a much higher yield than bonds.
But the problem is greater than just rising interest rates. Since the pandemic, there has been a broader question about whether offices, obviously a major presence within the commercial-real-estate sector, will be as central to the way we work as before. My own view, which is yet, uh, to be vindicated, is that human nature was not changed by the pandemic and that, in the end, co-workers will want to congregate. It is also hard to see how those firms that need an institutional culture will be able to build one remotely. Finally, if we do enter a recession (still my best guess), employees are likely to believe that it is in their interest to be ‘seen’ around the workplace.
But for now, offices are not looking like, shall we say, hot investment properties.
About 156 million square feet of office space construction currently is under way in the largest 54 U.S. markets, down from 186 million in the first quarter of 2020 before the pandemic hit, according to data firm CoStar Group Inc. That figure is expected to decline further as developers confront rising vacancies and falling rents in most markets.
The national office vacancy rate stands at 12.5%, up from 9.6% in 2019 and the highest since 2011, CoStar said. Just as worrisome for developers: 37% of the space under development remains available, more than double the rate in 2019 and approaching the record 39% in 2008, CoStar said.
“We’re not quite at 2008 levels, but we certainly could get there in the next year,” said Nancy Muscatello, a CoStar senior analyst.
Many companies have told workers to return to their offices after more than two years of remote work. But businesses also are adopting new workplace strategies that allow employees to work from home a few days during the week.
As a result, tenants need less office space. Most businesses aren’t including expansion space when they sign new leases as they often did in the past, according to brokers. About 212 million square feet of sublease space is currently available, according to CoStar, a record high since 2005 when the company began tracking the metric…
And as for what a collapse in the value of office buildings could mean for the tax base of cities such as New York, well . . .