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Commercial real estate (CRE) is showing “early signs of recovery” as market activity continues to pick up, according to Blackstone chief operating officer Jonathan Gray.
“Now, I’m not saying this is some sort of sharp V-shaped recovery, but as you get to this bottoming period, what you want to do is try to deploy capital into this,” Gray said at the Bernstein Strategic Decisions Conference on Wednesday.
He noted that most people will remain “very cautious” of the real-estate market because of the “negative headlines from the past.” But apparently not Blackstone, the New York-based private equity behemoth with more than $1 trillion in assets.
Gray said Blackstone has outperformed the market because of how the firm has positioned its portfolio. The firm’s largest concentration sits in logistics, which Gray called the best-performing sector. Blackstone also has large exposure in rental housing, and in particular student housing. The private-equity firm’s real estate fund has performed so well that industry insiders have questioned how Blackstone determines the value of its real-estate assets, the New York Times reported earlier in May.
Less than 2% of Blackstone’s exposure is in the U.S. office sector, which has struggled to bounce back after the pandemic, Gray added.
“I would say the combination of where we are at the cycle, the fact that we’ve got $64 billion of dry powder to deploy in real estate, and where we positioned our assets is going to lead to very differentiated outcomes,” he said. “But the market is going to be, I’m sure, for some period of time, very negative on real estate.”
Gray first suggested that real-estate values were bottoming out back in January, and pointed to investment opportunities within the residential sector, including single-family rentals and multi-family rentals.
CRE risks
With interest rates sitting at 5.25%-5.5% amid a higher-for-longer rate environment, banks with significant CRE exposure have reason to be concerned. Higher interest rates mean investors will have a hard time refinancing their CRE loans, about 40% of which will reach maturity between 2023 and 2025, according to the National Bureau of Economic Research. This, paired with lower property values and weak post-pandemic demand for office spaces, could lead more firms to default on their loans in the next few years.
That’s a major risk factor, especially for small and mid-sized regional banks, which hold close to 40% of $6 trillion in CRE debt and many of which have sizable CRE concentrations.
Citigroup downgraded Bank OZK to sell from buy over the health of two of its loans — a $135 million loan for a multi-use project in Atlanta and life sciences construction lending in general. The bank has a $915 million loan tied to a new research and development district on San Diego’s waterfront, which has been under development since 2020 but has yet to find a tenant.
Bank OZK’s stock plunged 17% Wednesday following the downgrade, but was up more than 4% on Thursday. As of the third quarter of 2023, the bank had $17.4 billion in CRE loans, making up 68.6% of its total loan volume.