Blackstone, Morgan Stanley Focus on Existing Portfolios Amid Challenging Environment

Real estate financiers are coping with a slowdown in deal activity and a challenging market by doubling down on existing portfolios, but they remain open to opportunities in fast growing sectors such as data centers. 

This is according to panelists in a session titled Trends in US Real Estate and Capital Markets at the MIPIM international property event in Cannes March 15th.

“There’s definitely a more limited universe of assets that we would be excited about investing in. Transaction volumes are very low and deal volume is very slow, so we’re focused on maximizing value for our investors in our existing portfolio and managing our position to make sure we can weather whatever is ahead of us over the course of the next 18-20 months,” said Michael Lascher, senior managing director at Blackstone.

Kwasi Benneh, managing director and head of North America commercial real estate lending at Morgan Stanley, seconded that asset management is the current focal point. “I never thought we would yearn for new deals like we do now. We’re very focused on the existing portfolio to make sure we get our arms around what’s going on with it,” he said. “In terms of trying to finance deals, we are spending a lot of time on ‘fallen angels’ — deals that in normal times can be refinanced very easily but because of the current state of the market it is really hard to get them done.”

Interest rate increases have started to bite in 2023 and are driving investment decisions and valuations, according to David Bouton, managing director and co-head, US CMBS and real estate finance, at Citi. “We’re looking at existing deals that are coming up to maturity and figuring out how to refinance them. That requires different capital,” he said.

But he highlighted there is still a lot of opportunity to be found. “We’re looking at existing deals that are coming up to maturity and figuring out how to refinance them. That requires different capital,” he said. “And certain sectors are very strong, whether that is industrial and storage or data centers while others are feeling the stress.”

In reference to sectors, Lascher said Blackstone, as a thematic investor, is keen to deploy capital in logistics, rental housing, resort/hotels, data centers and life-science offices. Blackstone’s interest in rental housing is across all segments including affordable housing. “There is a lack of housing supply across the globe so we continue to see strong rental growth,” he said. “Whether it’s affordable or market housing there is definitely a big need for it and we feel it’s a great area in which to invest.”

Industrial has cooled off somewhat but remains an appealing sector, said Bradley Weismiller, managing partner, real estate capital markets, at Brookfield Asset Management. “A lot of the heat that was driven by the rate environment has come off it but there is still very positive rental growth and a lot of the fundamentals are playing out with a very long runway,” he said.

Citing it as “the big post-Covid opportunity,” Lascher said rents in Blackstone’s industrial portfolio “continue to go up at a fast clip across the globe”.

Meanwhile, sectors that were hard hit by the pandemic are bouncing back strongly, namely hospitality and retail. Pricing power and spending in resorts and hotels have been picking up quickly over the past year, while retailers have been successful at adapting to changing consumer habits by integrating online shopping with the brick and mortar experience.

“We’re starting to see the mortgage market open up for retail in a way that it hasn’t in a long time, because if you’re thinking from a downside perspective it’s really easy to underwrite a retail asset … if after Covid it’s still there and still thriving then quite frankly you couldn’t have stress-tested it any more than closing the doors for a few months,” said Lascher.

Bouton cited data centers as the best performing sector since the pandemic with “exceptionally strong” underlying fundamentals and “tremendously positive net absorption”. Valuations over the past three years since the pandemic have seen a compounded annual growth rate of 17%.

“Demand is strong but supply is constrained. It is not considered a traditional asset class, therefore not all lenders understand it or are comfortable with that sector. But there is much more acceptance and understanding of it from the real estate finance community just given the tremendous amount of growth it has experienced,” he said.