Investors are withdrawing money from commercial property funds, putting pressure on real estate values

Blackstone and Starwood funds limit withdrawals following an increase in the number of redemption requests

Investors big and small are lining up to pull money out of real estate funds, the latest sign that rising interest rates threaten to lift the commercial real estate sector.
Blackstone Inc. announced last week that it will limit the amount of money investors can withdraw from its flagship $69 billion real estate fund following an increase in redemption requests. Starwood Capital Group told investors shortly afterward that it was also limiting withdrawals at the $14.6 billion fund, according to a person familiar with the matter.
The Blackstone and Starwood funds are the two largest non-traded real estate investment trusts, a popular investment structure among wealthy individuals.
Other UK private real estate funds target institutions managed by companies including BlackRock Inc. and CBRE Investment Management recently took similar steps to curb outflows, according to the companies. Some US pensions are also starting to pull money from real estate funds, say some advisers to these big investors.
The increase in requests for cash comes as more investors and financial companies turn their backs on real estate. Rising interest rates threaten to lower asset values ​​in this indebted industry. Meanwhile, there is increasing concern about weak demand for office space and a slowdown in rent growth in the apartment sector.
Commercial real estate values ​​"need to come down," said Joe Gorin, head of US real estate acquisitions at financial firm Barings, referring specifically to office buildings. "The question is how much."
The FTSE NAREIT All Equity REITs index, which tracks publicly traded homeowners, is down more than 20% this year, and office owners have seen much steeper declines. Banks are issuing fewer commercial mortgages than last year, brokers say, and building sales are falling as buyers shy away from prices that no longer match the worsening outlook.
The increase in redemption requests is still relatively small, and it may turn out to be short-lived. At the height of the epidemic in 2020, several pension funds sought to withdraw their money from investment vehicles, but many changed their minds when the outlook for the real estate market brightened the following year.
Still, if the number of investors asking for their money back continues to grow, it will likely become a problem for the real estate market. This is because funds that need to raise cash to repay their investors often have no choice but to sell buildings.
"It puts pressure on prices in general," said Nate Kellogg, president and director of executive search at investment adviser Marquette Associates.
Withdrawals from non-traded RESs Source: Robert A. Stanger & Co.

Mr. Kellogg said a growing portion of the pension funds and university endowments his firm advises are looking to pull money from real estate funds.
Unlike 2020, individual investors are also rushing to exit. Non-traded REITs paid $3.7 billion in redemptions in the third quarter. While they still raised more new money from investors than they lost in withdrawals, it marked the highest withdrawal figure in years and a 12-fold increase from the third quarter of 2021, according to Robert A. Stenger & Co., an investment banking company that follows the market.
These funds usually allow investors to withdraw money each month or quarter, but only up to a specified limit. Blackstone's $69 billion fund, known as Blackstone Real Estate Income Trust Inc., or BREIT, has a quarterly redemption limit of 5% of the fund's net assets. Last week, Blackstone said redemption requests had exceeded the ceiling, meaning some investors would not be allowed to redeem until next year.
Blackstone's stock fell 7% the day it announced the redemption limits. Starwood's untraded REIT has imposed similar restrictions as BREIT, said a person familiar with the matter.
Individual investors are withdrawing their money in part because they expect future losses, said Nori Lietz, a senior lecturer at Harvard Business School who has advised pension funds on real estate investments. Real estate funds usually base their valuations on valuations that can be slow to adjust to changing markets. This kept fund valuations high even when the real estate market deteriorated. But eventually, reality will catch up.
"Valuations are looking back, and the markets are looking forward, and people are trying to arbitrage and get their money out before the write-off happens," Ms. Leitz said.
Pensions usually set a target for what percentage of their assets should be held in real estate. As real estate fund valuations remained high while stocks and other markets fell, private real estate's share of pension fund assets relative to stocks rose. That creates pressure to sell from asset funds to rebalance, Kellogg said.
That was the case for the Washington State Investment Board, said James Eber, the board's director of institutional relations. The state pension fund reported that real estate made up 22.4% of its portfolio as of September 30, but its target was 18%.
Large institutional investors are instead moving to a lower-risk strategy of lending or simply hoarding cash for the deals that inevitably pop up during a downturn.
In Britain, property funds with more than £15 billion, equivalent to $18.3 billion, in assets blocked redemptions from institutions this fall, citing needs such as preserving cash and avoiding forced sales. The managers of these funds – including BlackRock, M&G Group, Schroders PLC, CBRE Investment Management and Legal & General – have confirmed that they have taken threshold measures.
The real estate funds are still raising money, but less than before. US-focused property funds raised $15.6 billion in the third quarter, according to Preqin – the lowest quarterly figure since 2020.
High interest rates have also made the non-traded REIT less attractive to new investors. When rates were low, non-traded REIT stocks were attractive because they offered a much higher yield than bonds.
But the bonds now pay much higher yields and are more liquid and less risky than non-traded REITs, advisers say.
Kelly Nielson, founder of Brava Financial LLC, a financial planning firm in San Diego, questioned why investors would lock up their money in a real estate fund that offers a slightly higher yield than some government bonds that pay 4.5% or 5%.
"It's not a fair trade off," she said.