Blackstone real estate investment trust (BREIT) is known as one of America’s largest and most dependable privately held REITs when it comes to delivering investor returns. However, 2023 has proven to be a difficult year for real estate investors, and Blackstone is not immune. As of May 1, 2023, Blackstone announced it is limiting investor withdrawals from its REIT, which is worth an estimated $70 billion.
This move is not a new trend, as Blackstone has been limiting monthly investor withdrawals since November. A clause in Blackstone’s standard shareholder agreement allows the company to limit withdrawals if the total amount of the withdrawal requests exceeds 5% of the fund’s net asset value. In what can be seen as a sign of the times for the troubled real estate market, Blackstone hasn’t released an estimate on when it may fulfill all investor redemption requests.
Blackstone investors requested a combined $4.5 billion in redemptions in April, but the fund only approved the release of $1.3 billion (29%) of the total requests. In March, investors also requested a total of $4.5 billion in redemptions, only for the fund to release $666 million in funds or 15% of the total amount.
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So, it’s not necessarily that Blackstone isn’t paying out at all, it’s that investors heading for the exit doors may have to wait in line before they can cash out. It’s understandable that Blackstone exercises the limitations clause on investor redemptions, but the news comes as a severe blow to investors, many of whom have been dealing with the effects of a declining real estate market for the last several months.
It’s not hard to imagine that many of the investors making the recent redemption requests were looking at Blackstone as their safe harbor REIT — the one that they could rely on when other real estate and investment holdings began to underperform. The overall trend of the commercial real estate market is down for several reasons, not the least of which is a steady diet of rate increases from the Federal Reserve.
Why Is Blackstone Suffering Right Now?
Rate increases are hitting the commercial real estate market particularly hard because of the way commercial real estate is financed. Since 2008, REITs, developers and fund managers have taken advantage of historically low interest rates to borrow aggressively because it allowed them to drastically increase the size of their portfolios. However, much of the borrowing for commercial real estate depends on shorter-term financing such as adjustable-rate mortgages (ARMs) or 15-year mortgages that need to be refinanced at some point in the life of the asset.
The need to refinance wasn’t a problem as long as interest rates stayed low. The pro-forma budget on many commercial assets assumed low interest rates, which helped REITs pay out impressive dividends while also making it easy to refinance or sell the asset at a profit to another REIT that could borrow money at a low interest rate to buy it.
When interest rates began to spike as the Fed tried to ward off inflation, a period of easy financing terms and being able to quickly liquidate assets or turn them profitable after renovations turned into the good old days. The new reality caught Blackstone and many other REITs off guard. The question facing Blackstone and other investors now is, how long will the trouble last and how bad will it get?
Hundreds of billions of dollars in commercial real estate assets may be coming up for refinancing in the next several years, and it’s already an impossibility that they will be able to complete those re-fis at the investor-friendly rates the fund managers were planning on. Some of the most dire predictions are for a wholesale slaughter, with foreclosures and plummeting asset values reminiscent of 2008.
Other prognosticators are not so bearish. They believe that there will be a market correction but that the increased liquidity requirements that were imposed on banks after 2008 should be able to stave off massive bank failures if there is a wave of commercial foreclosures.
Some of the increased liquidity requirements were relaxed for regional banks (after an extensive lobbying effort), and this move likely played a role in the collapse of several regional banks collapsed, most notably First Republic Bank, which was taken over by regulators and ultimately sold to JP Morgan Chase last month.
What Does The Future Hold For Real Estate Investors And REITs?
So, what is the long-term future for Blackstone and REIT investors? It probably lies somewhere in between the direst predictions and the most rose-colored expectations of today’s market. At a minimum, it may be a bumpy ride for the next few years, but investors should keep one important thing in mind — real estate’s performance history has shown it to be a resilient asset and a reliable one in terms of delivering returns.
The people who run REITs like Blackstone are well-versed in their fields and have proven track records of performance. As they get used to the new normal, the next stage of deals and acquisitions they make will be more reflective of the new reality confronting investors in terms of acquisitions, opportunity cost and investor returns.
For their part, investors will need to remain patient and increase their due diligence. In the meantime, they may want to consider publicly traded REITs or other investments such as tokenized real estate investing that will allow them to have greater flexibility in terms of liquidating their investment capital when the need presents itself. However, it is unlikely that real estate will cease being a vital investment sector.
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