"The future ain’t what it used to be." Yogi Berra
---- A juggernaut ----
The success of Blackstone's non-listed REIT ("BREIT") redefined the non-listed REIT space, which was previously perceived to be shady, fee-laden vehicles that benefited sponsors more than investors.
BREIT was raising $10B+ a quarter in 2021 when Blackstone had the Midas touch, investors had excess cash, and the outlook for CRE was pristine.
---- New reality: Net outflows ----
BREIT's net fundraising recently turned negative. Why is BREIT having such a hard time with fundraising? We think it may have something to do with BREIT's valuation methodology.
---- Property value declines ----
-- Actual trades suggest that property values are down by 8%, but these estimates are probably rosy since sellers haven't had to capitulate (yet).
-- What would values be if sellers capitulated? Green Street estimates this with its CPPI series, which is down 25%.
-- BREIT's NAV is only down 3%.
---- Valuation methodology ----
How are BREIT's values holding up? It's hard to imagine a $60B+ fund completely bucking the trend, so we think investors may be spooked by appraisal lag. most of BREIT's appraisals assume sub-6 % exit cap rates and 7% ish discount rates.
If you're a potential investor in BREIT, how do you respond to this? You probably wait.
---- So what? ----
Why does this matter if you're not a BREIT investor or a Blackstone employee?
...because most CRE investors still buy real estate for income, and most income-oriented properties are in open-end vehicles like BREIT, institutional core funds, etc.
These vehicles define the starting point and corresponding yields for real estate values.
If BREIT and BREIT-like vehicles can't raise money, they don't buy properties. Prices for relatively safe properties fall, their yields increase, and investors move out of riskier strategies until they bid up core property prices making riskier strategies attractive again. ("Why would I invest in assets that have 2-3x the risk with 12% returns when I can invest in core assets at 10%?")
---- Who is at fault? ----
Blackstone and other managers are probably more frustrated than anyone about this situation. Appraisers are in a tough situation because actual trades aren't suggesting big declines.
We think the real culprit is uncertainty. There's no easy way out of this. Capital will need incremental certainty (and lower bond yields) to wade back into CRE waters. It will certainly happen but may take some time.
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