The funding woes of Starwood Capital's private REIT are the latest sign that the storm is not yet over for retail investment products.
Starwood Real Estate Income Trust (SREIT) received $1.3 billion in withdrawal requests in the first quarter of this year but fulfilled less than $500 million of them, The Wall Street Journal reported this week. Starwood then reported that in April, SREIT's redemption queue exceeded its monthly limit of 2% according to Robert A. Stanger, a New Jersey-based investment bank. SREIT, with $9.9 billion in net assets, is second only to Blackstone in the private REIT space. Only 37% of requests were fulfilled that month.
SREIT currently has just $752 million in liquidity, according to SEC filings, less than what it needs to cover two quarters of redemptions and overall is “dangerously low,” said Kevin Gannon, chairman of Robert A. Stanger LLC, who said Starwood needs to create liquidity for the entity, either through a capital raise or a sale.
Private REITs have been facing liquidity problems since 2022, but the year started on a bright note. First-quarter statistics show fewer investors looking to cash out after redemption requests began to surge last year. In February, Blackstone fully met $961 million in requests for Blackstone Real Estate Investment Trust. It was the first time the company had fully paid out since November 2022, and it also made full payments in March and April. Gannon said Blackstone raised $493 million for BREIT in the first quarter, but redeemed $2.9 billion.
The big giants, BREIT and SREIT, are emblematic of the challenges in the private REIT market. Overall, private REITs have reported $2.2 billion in fundraising so far this year, with $758 million of that coming in April alone, according to Robert A. Stanger data released Tuesday. The bulk of April's fundraising came from a Delaware statutory trust UPREIT transaction between Ares Industrial Real Estate Income Trust and Ares Real Estate Income Trust. Excluding UPREIT transactions, year-to-date fundraising is down about 40% from last year. This decline follows a very weak 2023, with total NAV REIT net fundraising of -$6.2 billion, down sharply from about $23.2 billion in 2022.
The problem, Gannon said, is that many investors believe the market hasn't bottomed out yet and that prices haven't all softened yet, which makes private investors less willing to put money into real estate right now, he said.
But while people have been pulling back on their bets, over the past two years managers have been rapidly launching private REITs with the backing of retail capital to expand their real estate platforms. For example, in the past four months alone, S2 Capital launched a new private REIT targeting the multifamily sector, as did Bridge Investment Group, with the launch of Bridge Investment Group Industrial Real Estate Income Trust.
To be sure, private real estate financing has been tough across the board, but institutional investors are becoming more comfortable making commitments. Brookfield Asset Management President Connor Teske, for example, said during the company's first-quarter earnings call that the first quarter had been a “great” quarter for fundraising and that investors are “seeing the upside.” But individual investors still have a long way to go.