These Investors Are Shunning CRE

“Once-in-a-generation” is the way some big CRE fund managers have described current investment opportunities — even in office, which as a class has offered questions and doubt. Some of the funds have brought in billions for debt investment.

However, when it comes to owning property, many global investors are pulling back and showing their inner bear. Starwood Real Estate Investment Trust, which started seeing a big wave of redemption requests in late 2022, has drawn more than $1.3 billion of its $1.55 billion unsecured credit facility since the beginning of 2023 following heavy redemption requests, the Financial Times reported. Before 2023, the REIT hadn’t tapped its credit line. At the current rate, it will run out of credit and cash in the second half of this year unless it borrows more or sells more property assets, the FT says.  In 2023, investors withdrew $2.6 billion from Starwood and $12.4 billion from Blackstone’s BREIT.

Part of the issue is liquidity, a point Starwood CEO Barry Sternlicht made 18 months ago during its initial big redemption crisis. “We’re not a hedge fund,” he said when speaking with Newmark president Jimmy Kuhn at a New York University Schack Institute’s capital markets conference. “We can’t liquidate our properties overnight at attractive prices. We have to manage liquidity.”

Most recently at the Milken Institute Global Conference, Sternlicht said, “There’s a huge distressed cycle ahead of us.”

In general, CRE isn’t the best mechanism for liquidity, as shedding assets takes time. When interest rates are likely to be higher for longer than many predicted, there’s concern about being caught in maturing investments that need refinancing but can’t afford it.

There are also attending dynamics. The 10-year Treasury, even though yields have dropped since better inflation news earlier this week, still offers well over 4.3% at low risk. And money going into equities has rebounded, with the Dow Jones Industrial Average flirting with an all-time high of 40,000.

Bank of America’s fund manager survey, as reported by Investing.com, was the most bullish since November 2021. Cash levels are 4%, a three-year low. Eighty percent of the respondents still expected rate cuts in the second half of 2024 and no recession. “Furthermore, the survey shows fund managers expect the first drop in global GDP and EPS expectations since Sep 2023 as US macro pessimism jumps, although a soft landing is still the consensus,” the site wrote.

But a bull attitude in the survey doesn’t extend to CRE, the FT separately wrote. A net 28% of managers were underweight the real estate sector in May, down 13 percentage points on the previous month, according to Bank of America’s latest global fund manager survey, it reported. Allocations are at a 15-year low, which might not be surprising as CRE has thrived on a low-interest, high-leverage macroeconomic diet.