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.
Apple has fixed several security issues in its devices this year.
“I'm not saying this is a rapid V-shaped recovery, but when you hit bottom, you should try to deploy capital,” Gray said at the Bernstein Strategy Decision Conference on Wednesday.
He noted that most people will remain “very cautious” about the real estate market because of “past negative news,” but that doesn't seem to be the case for Blackstone, the New York-based private equity giant with more than $1 trillion in assets.
Gray said Blackstone's outperformance is due to the positioning of its portfolio. The firm's largest investment is in logistics, which Gray called the best-performing sector. Blackstone also has a large stake in rental housing, particularly student housing. The private equity firm's real estate funds have performed so well that industry insiders are questioning how Blackstone determines the value of its real estate assets, The New York Times reported in early May.
Gray added that less than 2% of Blackstone's investments are in the U.S. office sector, which has struggled to recover post-pandemic.
“The combination of where we are in the economic cycle, the fact that there's $64 billion to put into real estate and where they've placed the assets is going to produce a very different outcome,” he said, “but I do believe the market is going to be very negative towards real estate for a while.”
Gray suggested property prices hit bottom for the first time in January and pointed to investment opportunities in the residential sector, including single-family rental homes and multi-family rental properties.
CRE Risk
With interest rates hovering between 5.25% and 5.5%, and interest rates set to remain high for an extended period of time, banks with significant exposure to CRE have reason to be concerned. As interest rates rise, investors will have a harder time refinancing their CRE loans. About 40% of CRE loans mature between 2023 and 2025, according to the National Bureau of Economic Research. This, combined with declining real estate values and sluggish office demand post-pandemic, could lead to more companies defaulting on their loan payments in the coming years.
This is a particularly big risk factor for small and mid-sized regional banks, which hold nearly 40% of the $6 trillion in CRE debt, many of which have significant CRE concentrations.
Citigroup downgraded Bank OZK to “sell” from “buy,” citing the strength of two loans: a $135 million loan for a mixed-use project in Atlanta and general life sciences construction loans. The bank has a $915 million loan tied to a new research and development district on San Diego's waterfront that has been in the works since 2020 but has yet to find a tenant.
OZK Bank shares plunged 17% on Wednesday following the downgrade but rose more than 4% on Thursday. As of the third quarter of 2023, the bank's CRE loans stood at $17.4 billion, accounting for 68.6% of its total loan volume.