Why the biggest real estate funds still struggle  
Daniel Geiger
Private Equity
Blackstone says commercial real estate is rebounding, but investors are pulling money out.

Both Blackstone's BREIT and Starwood's SREIT had big withdrawals in the first quarter.

With interest rate cuts expected, some experts believe real estate's biggest buyers will be back.

Blackstone, the world's largest landlord, contends the worst is over for commercial real estate. Investors, however, are not so sure.

In the first quarter, shareholders in Blackstone Real Estate Income Trust, or BREIT, its $59 billion flagship real estate investment fund, pulled out almost a billion dollars a month on average, according to the company's first-quarter earnings statement.

Although smaller by dollar size than a peak in withdrawals last year, the exodus still amounted to roughly 5% of the fund's net asset value, a threshold at which BREIT caps redemptions per quarter.

A similar investment fund operated by Barry Sternlicht's Starwood Capital has had an even greater retreat by investors.

In the first quarter, shareholders asked for $1.3 billion of their cash back from Starwood Real Estate Income Trust, a $10 billion non-traded REIT that is the country's second largest behind BREIT. It too institutes a 5% quarterly cap on redemptions and met only $492.12 million of the requests during the quarter.

The outflows show the persistent concerns from investors who once rushed to pour tens of billions of dollars into the funds and the difficulty that top executives at Blackstone and Starwood — two of the real estate industry's leading players — have had turning the page on the travails.

"Investors have gone sideways on real estate," said Kevin Gannon, the chairman and CEO of Stanger, an investment banking and research firm that tracks the non-traded REIT industry. " What they're doing is putting their money elsewhere."

The rise and fall of real estate's biggest buyers

Founded in 2017, BREIT kicked off a resurgence of non-traded real estate investment trusts, or REITs, in recent years, reinvigorating an industry that had long suffered from a reputation for high fees, mediocre assets, subpar management, and anemic returns.

BREIT instead offered Blackstone's vaunted investment expertise and sought to allow everyday inventors access to lucrative opportunities normally cordoned off to the wealthy and to institutional clientele, like pension funds, sovereign wealth, and family offices.

Other Wall Street names, including KKR, Apollo, Ares, and Brookfield, launched or acquired similar vehicles in the sector in subsequent years.

Unlike public REITs, which can be traded freely and whose prices are driven by market demand for the shares, non-traded REITs generally have a semi-liquid structure. That means that investors can sell their stock back to the funds only during monthly redemption windows. Share pricing is determined through appraisals of the value of the underlying real estate holdings.

When the Federal Reserve began lifting interest rates beginning in March 2022, it caused downward pressure on commercial real estate prices and touched off a run on the non-traded REIT industry as investors grew concerned their shares would plummet in value. In 2022 and 2023, shareholders withdrew almost $23 billion from BREIT and $4 billion from SREIT, according to Stanger.

At the nadir of the panic in the first quarter of 2023, BREIT received requests to cash out 10.8% of the fund's equity, more than double the monthly limit.

A year later, executives at Blackstone have sought to tell a different story.

"Repurchase requests in BREIT have fallen 85% from the peak to the lowest level in nearly two years," Jon Gray, Blackstone's president, said during an April earnings call for the investment firm. "We are confident in the recovery of BREIT flows over time given performance."

Through the tumult, executives from both BREIT and SREIT have stressed the strength of their portfolios, highlighting how they're anchored in warehouses, rental apartments, and other assets that have better withstood the strain of higher interest rates.

Gray, for instance, has highlighted BREIT's growing exposure to the nation's hot data center market.

BREIT's "outperformance continued with strong results in Q1 underpinned by outstanding portfolio positioning that includes growth in its data center exposure," Gray said during the earnings call.

BREIT's shareholders coming around?

For Blackstone, there are signs its message is getting through.

In March, shareholders sought to cash out $800 million from the fund, the lowest level since 2022. That was 17% less than February's $963 million of redemptions, and 27% less than January's $1.1 billion.

Because the quarter's withdrawals did not meaningfully exceed BREIT's redemption cap, it was also the first time in two years that there wasn't a backlog of unmet requests, which would otherwise pile into the next month's queue of exits – another signal the crisis is fading.

With redemptions now under its limit, Blackstone has said it will disclose the amount of monthly reimbursement requests on a quarterly basis, rather than each month as it did in 2022 and 2023. Its April, May, and June redemptions, therefore, won't be known until BREIT's second-quarter earnings statement in August.

Though its fortunes may be on the upswing, BREIT is still far from the vehicle that spent roughly $70 billion vacuuming up real estate assets across the market.

During the first quarter, the fund raised only $493 million from investors, according to Stanger, compared with a peak of "about $2 billion a month" before the interest rate increases began, Gannon said.

A deal in April by Blackstone to acquire the public apartment owner Air Communities for $10 billion, notably, is being done by Blackstone Real Estate Partners X, an institutional fund managed by the investment firm that is separate from BREIT.

In May, Blackstone Real Estate Partners X also completed the $3.5 billion acquisition of Tricon Residential, an owner of single family rental homes. BREIT, which before the transaction held an 11.6% stake in Tricon, maintained its position in the company in the deal.

"They're not the behemoth in terms of acquisition activity that they were," Gannon said.

SREIT may be forced to sell assets

SREIT faces a more urgent predicament.

The fund reported that it had drawn down its available capital to $700 million, from $1.1 billion at the start of the year, to help it meet redemptions. If the withdrawals continue, it could force the fund to sell off assets before the end of the year to pay off shareholders.

During a recent call to discuss the fund's performance, Sternlicht, Starwood's chief executive, didn't comment on its shrinking liquidity, but said that the sales market for commercial real estate was improving – a suggestion that it could raise cash through property dispositions if it needs to. He noted that a Starwood investment fund had recently sold two Nashville hotels at "attractive yields."

"There are other large pending trades that will I think begin to start people thinking they should tiptoe " into the property sales market, Sternlicht said.

Some experts, however, expect a turnaround before big-name players such as SREIT are forced to liquidate assets.

Todd Henderson, the head of real estate for DWS, an asset manager that oversees a $550 million non-traded REIT, anticipated upcoming Fed rate cuts that would prompt investors to file back into non-traded REITs in search of yield.

"I think it's second half of the year to first part of next year where you're going to see a rotation back into this product," Henderson said. "It'll be back in growth mode."
Blackstone says commercial real estate is rebounding, but investors are pulling money out.
Both Blackstone's BREIT and Starwood's SREIT had big withdrawals in the first quarter.
With interest rate cuts expected, some experts believe real estate's biggest buyers will be back.
Blackstone, the world's largest landlord, contends the worst is over for commercial real estate. Investors, however, are not so sure. In the first quarter, shareholders in Blackstone Real Estate Income Trust, or BREIT, its $59 billion flagship real estate investment fund, pulled out almost a billion dollars a month on average, according to the company's first-quarter earnings statement. Although smaller by dollar size than a peak in withdrawals last year, the exodus still amounted to roughly 5% of the fund's net asset value, a threshold at which BREIT caps redemptions per quarter. A similar investment fund operated by Barry Sternlicht's Starwood Capital has had an even greater retreat by investors. In the first quarter, shareholders asked for $1.3 billion of their cash back from Starwood Real Estate Income Trust, a $10 billion non-traded REIT that is the country's second largest behind BREIT. It too institutes a 5% quarterly cap on redemptions and met only $492.12 million of the requests during the quarter. The outflows show the persistent concerns from investors who once rushed to pour tens of billions of dollars into the funds and the difficulty that top executives at Blackstone and Starwood — two of the real estate industry's leading players — have had turning the page on the travails. "Investors have gone sideways on real estate," said Kevin Gannon, the chairman and CEO of Stanger, an investment banking and research firm that tracks the non-traded REIT industry. " What they're doing is putting their money elsewhere." Founded in 2017, BREIT kicked off a resurgence of non-traded real estate investment trusts, or REITs, in recent years, reinvigorating an industry that had long suffered from a reputation for high fees, mediocre assets, subpar management, and anemic returns. BREIT instead offered Blackstone's vaunted investment expertise and sought to allow everyday inventors access to lucrative opportunities normally cordoned off to the wealthy and to institutional clientele, like pension funds, sovereign wealth, and family offices. Other Wall Street names, including KKR, Apollo, Ares, and Brookfield, launched or acquired similar vehicles in the sector in subsequent years. Unlike public REITs, which can be traded freely and whose prices are driven by market demand for the shares, non-traded REITs generally have a semi-liquid structure. That means that investors can sell their stock back to the funds only during monthly redemption windows. Share pricing is determined through appraisals of the value of the underlying real estate holdings. When the Federal Reserve began lifting interest rates beginning in March 2022, it caused downward pressure on commercial real estate prices and touched off a run on the non-traded REIT industry as investors grew concerned their shares would plummet in value. In 2022 and 2023, shareholders withdrew almost $23 billion from BREIT and $4 billion from SREIT, according to Stanger. At the nadir of the panic in the first quarter of 2023, BREIT received requests to cash out 10.8% of the fund's equity, more than double the monthly limit. A year later, executives at Blackstone have sought to tell a different story. "Repurchase requests in BREIT have fallen 85% from the peak to the lowest level in nearly two years," Jon Gray, Blackstone's president, said during an April earnings call for the investment firm. "We are confident in the recovery of BREIT flows over time given performance." Through the tumult, executives from both BREIT and SREIT have stressed the strength of their portfolios, highlighting how they're anchored in warehouses, rental apartments, and other assets that have better withstood the strain of higher interest rates. Gray, for instance, has highlighted BREIT's growing exposure to the nation's hot data center market. BREIT's "outperformance continued with strong results in Q1 underpinned by outstanding portfolio positioning that includes growth in its data center exposure," Gray said during the earnings call. For Blackstone, there are signs its message is getting through. In March, shareholders sought to cash out $800 million from the fund, the lowest level since 2022. That was 17% less than February's $963 million of redemptions, and 27% less than January's $1.1 billion. Because the quarter's withdrawals did not meaningfully exceed BREIT's redemption cap, it was also the first time in two years that there wasn't a backlog of unmet requests, which would otherwise pile into the next month's queue of exits – another signal the crisis is fading. With redemptions now under its limit, Blackstone has said it will disclose the amount of monthly reimbursement requests on a quarterly basis, rather than each month as it did in 2022 and 2023. Its April, May, and June redemptions, therefore, won't be known until BREIT's second-quarter earnings statement in August. Though its fortunes may be on the upswing, BREIT is still far from the vehicle that spent roughly $70 billion vacuuming up real estate assets across the market. During the first quarter, the fund raised only $493 million from investors, according to Stanger, compared with a peak of "about $2 billion a month" before the interest rate increases began, Gannon said. A deal in April by Blackstone to acquire the public apartment owner Air Communities for $10 billion, notably, is being done by Blackstone Real Estate Partners X, an institutional fund managed by the investment firm that is separate from BREIT. In May, Blackstone Real Estate Partners X also completed the $3.5 billion acquisition of Tricon Residential, an owner of single family rental homes. BREIT, which before the transaction held an 11.6% stake in Tricon, maintained its position in the company in the deal. "They're not the behemoth in terms of acquisition activity that they were," Gannon said. SREIT faces a more urgent predicament. The fund reported that it had drawn down its available capital to $700 million, from $1.1 billion at the start of the year, to help it meet redemptions. If the withdrawals continue, it could force the fund to sell off assets before the end of the year to pay off shareholders. During a recent call to discuss the fund's performance, Sternlicht, Starwood's chief executive, didn't comment on its shrinking liquidity, but said that the sales market for commercial real estate was improving – a suggestion that it could raise cash through property dispositions if it needs to. He noted that a Starwood investment fund had recently sold two Nashville hotels at "attractive yields." "There are other large pending trades that will I think begin to start people thinking they should tiptoe " into the property sales market, Sternlicht said. Some experts, however, expect a turnaround before big-name players such as SREIT are forced to liquidate assets. Todd Henderson, the head of real estate for DWS, an asset manager that oversees a $550 million non-traded REIT, anticipated upcoming Fed rate cuts that would prompt investors to file back into non-traded REITs in search of yield. "I think it's second half of the year to first part of next year where you're going to see a rotation back into this product," Henderson said. "It'll be back in growth mode."
 The rise and fall of real estate's biggest buyers BREIT's shareholders coming around? SREIT may be forced to sell assets