Nothing turns heads in the commercial real estate industry like news of a property placed into special servicing. For this reason, tongues have been wagging about a few looming foreclosures of properties owned by Blackstone, the largest owner of commercial real estate in the world. When a special servicer gets involved, it can be an indicator of an impending downward spiral, but for Blackstone, the recent transfer of three commercial mortgage-backed securities loans totaling roughly $900 million into special servicing is part of their strategy.
Blackstone isn’t struggling for cash. During the company’s fourth-quarter and full-year 2022 investor call on January 26, 2023, executives noted more than once that the asset management giant has roughly $187 billion of dry powder for opportunistic investments. So, with such ample capital on hand, why not continue to pay the loans on the multifamily portfolio and two office properties in question? There’s a method to the company’s madness, which, as it turns out, is not madness at all.
In January, a loan with a balance of approximately $270.3 million secured by an 11-property Blackstone multifamily portfolio totaling 637 apartment units in Manhattan was transferred to a special servicer. A 2015 acquisition of Blackstone’s Blackstone Real Estate Partners VIII and Fairstead Capital, the group of Class A and B+ properties, which includes the 200-unit apartment building at 250 W. 19th St., has an average occupancy level of 93 percent. However, as Moody’s Investors Service notes in a March 21 rating action, due to the pandemic (and likely the accompanying rent moratorium) the properties didn’t generate sufficient cash to cover debt service.
“The transfer to special servicing for this non-recourse loan was an integral part of the process as we work in good faith with our lenders to get the best outcome possible for both the debt and equity investors,” a Blackstone spokesperson told Propmodo. The multifamily sector continues to thrive across the country, but the Manhattan portfolio has other challenges aside from diminished cash flow, including the floating-rate interest attached to the debt and the slow recovery of multifamily properties in urban locations.
Blackstone’s Manhattan multifamily portfolio loan remains current, presently paid through March 2023. Additionally, the company continues to manage the portfolio, with residents being none the wiser in terms of the services Blackstone provides at the buildings. In Manhattan and beyond, Blackstone remains keen on the multifamily sector. In October 2022, affiliates of Blackstone Real Estate completed the $3.6 billion acquisition of Bluerock Residential Growth REIT, enhancing Blackstone’s multifamily footprint with the addition of 30 properties totaling 11,000 residential units in five key U.S. markets.
The sagging office sector spares no one
The month of March brought news of two more Blackstone loans being handed over to special servicers, including the loan on the Hughes Center mixed-use office campus in Las Vegas. Blackstone Real Estate Partners VII acquired the master-planned complex featuring 1.5 million square feet of Class A office space for $347 million 10 years ago. The $325 million, non-recourse CMBS loan on the property just entered special servicing due in no small part to the weak office market. While the fourth-quarter 2022 total office vacancy rate in Las Vegas marked a year-over-year decline, according to a report by Avison Young, the figure still remained a less than stellar 13.8 percent.
The Hughes Center loan fell victim to the ongoing impact of the pandemic. Blackstone took action in advance of the loan’s transfer to special servicing. “This 2013 investment was substantially written down beginning three years ago due to the headwinds facing U.S. traditional office,” the Blackstone spokesperson said.
Despite the Hughes Center disappointment, Blackstone is still quite obviously keen on Las Vegas. The company boasts $20 billion in investments in the city, the majority of which involve multifamily, industrial, and net lease hospitality assets.
The other struggling office building, Blackstone’s Manhattan office tower at 1740 Broadway, is a victim of the lackluster office sector, too. Blackstone acquired the approximately 600,000-square-foot office tower for $605 million in late December 2014, but in 2022, when lead tenant L Brands left the building upon its lease expiration, the property’s occupancy level plummeted to roughly 10 percent. The recent eyebrow raising in the real estate community about the debt attached to 1740 Broadway is actually based on old news. The $308 million CMBS loan on the building moved to special servicing in March 2022. However, at the beginning of March 2023, the loan was moved from one special servicer to another, Midland Loan Services.
The placement of the Hughes Center and 1740 Broadway loans with special servicers doesn’t register as a big loss for Blackstone. Traditional U.S. office assets comprise just 2 percent of the company’s global portfolio, down from 50 percent in 2007. Since 2018, Blackstone has written down the equity value of U.S. office assets drastically. And it’s not a bad idea to keep a foothold, even if it’s just 2 percent, in the U.S. office market. After all, the Class A sector is faring well. As noted in a Colliers report, the contingent of office users that are eager to attract and retain the best-and-brightest with top-of-the-line workplace amenities are finding that the supply of available Class A office assets is limited.
“There is a massive bifurcation in real estate performance, and what you own matters, which is why…our global portfolio is approximately 80 percent concentrated in industrial, rental housing, hotels, lab office and data centers—sectors with exceptionally strong fundamentals,” Blackstone’s spokesperson added.
They told us so
The fact that Blackstone allowed three loans to transfer to special servicing should come as no surprise. The company has noted in its earnings report, quarter after quarter, that its real estate funds’ investments are at the mercy of real estate fundamentals, local market and economic conditions, and changes in interest rates and correlating borrowing costs. All of which, as the company noted in its fourth-quarter 2022 earnings call, “may render the sale or refinancing of properties difficult or impracticable.”
Ultimately, the special servicing play, when put into context, is barely a blip on the radar for Blackstone. After all, the three loans account for not quite $1 billion of the company’s $600 billion real estate portfolio. It’s not just Blackstone that views the transfer of the loans to special servicing as a minor occurrence: the stock market hasn’t reacted with any significance. On the last trading day of 2022, the company’s stock traded at an opening price of $73.58 per share. On Friday, March 24, Blackstone shares traded at an opening price of $82.07.
Of course, Blackstone is not the only real estate giant that is pursuing alternatives for problematic loans. In a February report to the SEC, Brookfield revealed it had defaulted on loans with a total outstanding balance of more than $750 million on Gas Company Tower and 777 Tower, two Los Angeles office skyscrapers. And in late December 2022, Vornado Realty Trust’s Fifth Avenue and Times Square joint venture failed to repay a $450 million non-recourse mortgage loan on 697-703 Fifth Avenue, a high-street retail asset in Manhattan, resulting in lenders declaring an event of default. It’s a sign of the post-pandemic times.
Despite a few transferred loans, Blackstone still seems as solid as a rock. Special servicers holding debt on three of the approximately 12,000 real estate properties in the company’s portfolio is not indicative of a downward trend. Ultimately, Blackstone’s status as the world’s largest investment manager, with nearly a trillion dollars in assets under management, buys a lot of confidence among the investment community, and its name, prominence and track record will likely be enough to stave off panic over three loans.