Blackstone Sends Shockwaves through European Markets

Blackstone’s (BX) default on €300M ($319M) of a €531M commercial mortgage-backed security (CMBS) for Finnish properties warns of a grim outlook for lower-quality office and retail assets globally and could affect international acquisitions.

Jordan B.
March 07, 2023

Together with

Good morning. Welcome back to the CRE Daily. Here’s what we got for you today:

Blackstone Inc. faces conflict with lenders over European real-estate portfolio
Chicago officials aim to continue “LaSalle Street Reimagined” project
Barry Sternlicht expects Fed’s anti-inflation campaign to fail, plans to take no action

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TIME TO PANIC?

Blackstone’s €531M CMBS Default Foreshadows Trouble for Real Estate Investors

Blackstone’s (BX) default on €300M ($319M) of a €531M commercial mortgage-backed security (CMBS) for Finnish properties warns of a grim outlook for lower-quality office and retail assets globally and could affect international acquisitions.

Sorry about that: Blackstone purchased several Finnish properties from Sponda Plc. through a CMBS loan in 2017 with an original balance of €531M. With $319M still owed and unable to restructure, Blackstone is now officially in default on their loan.

What happened: The macroeconomic and geopolitical environment and Blackstone’s mismanagement of these assets are the main reasons for this situation, highlighting the importance of correctly evaluating the value of all assets in a purchase.

Office ‘zombie’ apocalypse: Tenants demand attractive, convenient, and eco-friendly properties. Offices require eco-friendly locations with pleasing interiors to attract staff, while retail must compete with e-commerce. Disappointing spaces may become “zombie” properties, with landlords returning keys to lenders.

➥ THE TAKEAWAY

Handle with care: Buyout firms buying listed property firms must weigh the risks of bundled lower-quality assets, as losses may exceed gains. International buyers cannot replace local investment demand, which is evident from Blackstone’s clash with lenders. It’s a totemic moment as Blackstone was pivotal in reviving the European CMBS market after the financial crisis.

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WHAT NOW?

Chicago’s LaSalle Street Redevelopment Stopped Before It Began

Chicago officials are pushing forward with Mayor Lori Lightfoot’s “LaSalle Street Reimagined” initiative to redevelop vacant commercial space on LaSalle Street to multifamily housing, but the program’s future is uncertain now that Lightfoot has been voted out of office.

Changing the gameplan: Lightfoot started the program last year hoping to revitalize the LaSalle Street corridor, but office buildings there are faring even worse than the downtown average vacancy rate of more than 20%, a record high. Original plans to revitalize the downtown district have now changed to invest in neighborhoods further out from LaSalle.

Easier said than done: It’s not cheap to rebuild 5M SF of commercial and residential space, and observers believe the incoming mayor will have to ‘twist some arms on the city council’ to maintain support for the ambitious project. Planning commissioner Cox (appointed by Lightfoot) believes new redevelopment would ‘make the heart of the Loop more resilient and dynamic on behalf of the entire city, and also more diverse.’

Coming up with the money: The city is requiring 30% of new units to be leased at affordable levels to be eligible for tax increment financing and other financial assistance from the city. Aldermen may prefer to pair the program with projects that make use of other tax incentives, such as Class L tax designations and other potential affordable housing subsidies available from the state or Cook County.

➥ THE TAKEAWAY

Eagle’s eye view: The LaSalle Street Reimagined program is an ambitious initiative to bring much-needed housing to the downtown area, but it requires the support of the incoming mayor, the city council, and other government agencies to be successful. Developers may also need to be creative in finding other sources of funding and tax incentives to make their projects viable.

🌐 AROUND THE WEB

📖 Read about how public companies will be forced to disclose how much compensation their CEOs actually get after gains and losses in their stock awards.

🖥️ Watch to see how Compass’s 2-year losses have exceeded $1B as the once high-flying brokerage has been forced to cut costs after finding itself deep in the red.

🎧 Listen to this episode of The FORT with Chris Powers in which the failed Fyre Festival’s Billy McFarland explains the hard lessons he’s learned and details his latest venture.

STILL IN KANSAS

Starwood Could Deploy Capital Right Now, But Sternlicht Won’t

Starwood Property Trust (STWD) is one of the largest US commercial mortgage REITs and could profit from making CRE loans right now. But Chairman and CEO Barry Sternlicht plans on doing ‘virtually nothing’ instead.

Playing zone defense: Sternlicht believes that because banks are on the sidelines, Starwood could deploy capital extremely well at incredible spreads. But instead of jumping into loan origination and being highly profitable while doing so, Starwood says they are ‘going to play defense’ to protect the REIT’s liquidity, blaming the Fed and pleading for them to pause rate hikes.

Not the Wizard of Oz: Sternlicht has been quite outspoken in his criticism of the Fed and their plan to lower inflation to 2%, claiming ‘The Wizard of Oz couldn’t do that.’ He believes further rate hikes could destroy real wages and erase jobs across the service economy. However, he noted that openings exist for Starwood partly because banking regulators are telling banks to cut back lending and shrink their balance sheets.

➥ THE TAKEAWAY

Nothing to do but wait: There were 54% fewer originations for CRE loans in Q4 compared to Q3, according to the Mortgage Bankers Association. And big banks leery of loans are boosting their reserves as they prepare for more losses to come due to the Fed’s continued rate hiking campaign. Currently, Starwood has reduced its exposure to the office sector and has almost no exposure to NYC or San Francisco.

✍️ Daily Picks

Nothing on tap: The US craft beer industry anticipates its slowest year for brewery openings in a decade, following more than 200 brewery closings last year as competition intensified.
By the notices: A report from Princeton University’s Eviction Lab reveals evictions from suburban homes are up over the past two decades, while city center evictions are about the same.
Perception of value: Buyers are paying an average 30% premium for luxury residences affiliated with hotel brands, even when there is no hotel attached.
Tapping out: The US CMBS delinquency rate was up 18 basis points in February to 3.12%, the second largest increase since June 2020. The overall rate is still down 75 basis points YoY.
The long view: As employees demand more flexibility and a better work-life balance, the shift to hybrid work could affect not only CRE but even the housing market itself.
The new oil: Data center rents have surged 20% in some markets after almost a decade of declining rents, due in part to high inflation and a growing supply and demand imbalance.
Even better buy: Best Buy will open more outlet stores to cater to budget-conscious customers while offering ‘open-box’ electronics at a discount.
Our role models: The Fed is struggling to control $2.5B in expenses (up from a $1.9B estimate) for the renovation of three office buildings overlooking the National Mall.
Not a great sign: For the first time since 2012, median US home sale prices have fallen YoY due to high mortgage rates, turning buyers off and leading to sellers asking less for their homes.
Getting into the zone: Consultants working on a revamp of Palm Beach’s 50-year-old zoning code presented plans at a four-day event dubbed ‘Designing our Palm Beach Week.’

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🤝 Deals & Dealmakers

Multifamily moves: Commercial real estate firm Bull Realty has completed the $8.3m sale of a three-property multifamily portfolio in Cordele, Georgia, to a family office.
Rumor mill: Saudi Arabia’s Public Investment Fund is in talks to acquire a significant minority stake in Rocco Forte Hotels, potentially valuing the luxury hotel group at around $1.4B.
Walmart what? Walmart (WMT) plans to open 75 new Walmart Health center locations by 2024, including in two new states—Missouri and Arizona.
Luxury living: Ian Scrager’s The Edition hospitality group is set to open Tampa, FL’s first 5-star hotel, which will boast 26 floors, 172 rooms, and 38 private residences.
Gettin’ expensive: Dallas County has approved funding for 1,516 affordable housing units with pandemic relief dollars and aims to build 2,000 units over the next 3 years.
Go big or go home: Scott Rechler’s RXR is teaming up with Lennar Corp. on a massive $3B project that will include 1,100 single-family homes and 1,000 rentals.
Back-scratching: Realty Income Corp. (O) reached a $1.5B sale-leaseback deal for Cumberland Farms and 415 single-tenant convenience stores.