While specific segments of the commercial real estate (CRE) market such as industrial and healthcare are performing well, others like office and retail are alarming investors.
Rising interest rates are heightening those concerns. In response, investors are actively reducing their exposure to the CRE market.
According to The Wall Street Journal, real estate investment trusts (REITs) are fighting to stop investors from pulling their money out. Blackstone Inc. (NYSE: BX) announced a tightening of redemptions for its $69 billion fund. Starwood Capital Group, an affiliate of Starwood Property Trust Inc. (NYSE: STWD), has also put new restrictions on investors bailing from its $14.6 billion fund.
Blackstone and Starwood, which are nontraded REITs, have capped investor redemptions while paying out $3.7 billion in withdrawals in the third quarter. While nontraded REITs can limit withdrawals on a monthly or quarterly basis, if investors’ redemption trends continue, they could end up having to sell other assets to pay for them.
The WSJ reports that the number of withdrawals is 12 times more than in the same period in 2021, according to an analysis from Robert A. Stanger & Co. Inc.
“That puts pressure on prices overall,” Nat Kellogg, president and director of manager search at investment adviser Marquette Associates, told the WSJ.
He also said an increasing number of pension funds and university endowments his company advises are considering withdrawing money from real estate funds.
According to the Financial Times, Blackstone’s problems began in the spring and summer when Asian investors started pulling money as property markets declined. The Financial Times also reported investors withdrew more than 2% of the trust’s net assets in July. In response, Blackstone CEO Stephen Schwarzman and President and Chief Operating Officer Jon Gray invested $100 million of their own money in the trust.
To replace the CRE strategy, investors are now looking at less risky pursuits such as bonds, which are paying higher returns than before with more liquidity than real estate funds. It was lower interest rates that drew investors to the real estate funds from bonds originally. But after the Federal Reserve’s multiple interest rate increases this year, many are returning to the bond well.
The withdrawals are also a strong sign investors are nervous about the volatile forecast for CRE, especially office space, which has not recovered after a pandemic-infused workplace exodus.
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