Pummeled Blackstone Real Estate Unit Seems Poised for a Revival

Blackstone Inc.’s battered real estate trust appears to be in comeback mode. Commercial real estate has been the bête noire of investing for the past couple of years, and Blackstone Real Estate Income Trust took its lumps in 2023, with its main investment class losing 0.5% and lots of investors exiting.

The worst appears to be over for commercial property, with some possible exceptions such as offices. As investment manager Wilmington Trust stated in a recent research report, “fundamentals remain strong” in many CRE segments, such as industrial and multifamily, and expected lower interest rates and the absence of a recession should bring the start of a recovery in 2024’s second half.

For BREIT (assets: $61 billion), as the Blackstone trust is known, “we’ve seen a bottoming out, and in 2024, the clouds will part,” Blackstone’s global co-head of real estate, Nadeem Meghji, told shareholders last month, pointing to the anticipated rate cuts. BREIT has seen a slowing of redemption requests so that it no longer has to cap them at 2% of the fund’s net asset value monthly.

One sign of health, or at least optimism, is making an acquisition. Amid tough times for real estate, BREIT recently announced it was buying a single-family rental company, Tricon Residential, for $3.5 billion. Also, in December 2023, BREIT agreed to buy 20% of a facility that holds a $16.8 billion senior mortgage loan portfolio, formerly owned by failed Signature Bank. This $1.2 billion investment, made in partnership with the Canada Pension Plan Investment Board and Rialto Capital, is a joint venture with the Federal Deposit Insurance Corp., which seized Signature’s assets.

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An early vote of confidence in BREIT came in January 2023 at the height of redemptions when UC Investments, which manages the University of California’s endowment, announced a $4 billion investment in the fund. “In the current environment, investors can benefit from stable cash-flowing investments that can grow with high global inflation,” Jagdeep Singh Bachher, the University of California’s CIO, said in a statement. “We consider BREIT to be one of the best-positioned, large-scale real estate portfolios in the U.S.”

BREIT is a non-public REIT, meaning it is not exchange-traded. The upside for the fund is that investor withdrawals are limited, so the trust cannot suffer a massive capital outflow all at once—an advantage that has served it well as commercial property buckled under rising mortgage rates and mounting recession fears, along with the post-pandemic change in work habits. But now the Federal Reserve is openly talking about reversing its rate hikes, and economists no longer consider a recession a certainty.

Since its launch in 2017, BREIT has done well, rising 12% annually, close to the increase in the S&P 500 over the period and (per Blackstone) more than double the return of private REITs overall. BREIT started out strong, yet faded once the Fed began escalating rates in 2022: It returned 30% in 2021 and 8.4% in 2022.

Blackstone touts BREIT’s asset allocation as a major plus going forward. It has only 3% in offices, the most troubled CRE sector, given the work-from-home mentality that has taken root thanks to the pandemic.

The fund has 25% in apartments and an identical share in the industrial sector — mostly in warehouses, but also in factories. Demand should be solid for apartments, according to CBRE, the real estate services and investment firm. Reason: a shortage of single-family homes, which has led to an affordability issue for many people. While the pandemic-driven boom in warehouses has faded, CBRE still sees a strong future for industrials because of the ongoing onshoring of manufacturing.

Another factor favoring BREIT is that most of the fund’s holdings are in the Sun Belt, which is growing faster than the rest of the country, said Meghji. He added, “This is a great time to deploy capital.”