Blackstone Scores $4B From UC Investments Despite Redemption Caps

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✉ In today’s email: 

• BREIT: Blackstone (BX) secures a cool $4B from UC Investments

• Loans: Borrowers are snoozing on Fannie & Freddie's favorable financing 

• Hospitality: Experts believe potential recession impacts are overblown

• Chart: It’s getting even harder for renters to afford housing vs. homeowners

Blackstone Scores $4B From The University of California

The University of California’s investment arm is betting big on Blackstone’s (BX) BREIT. UC Investments plans to invest $4B in Class I common shares, giving the REIT a longer-term source of capital.

Old friends: Last month, Blackstone (BX) capped investor redemptions amid liquidity concerns, prompting inquiries from the SEC. UC Investments, which has previously invested with Blackstone’s (BX) private equity funds, wasn’t concerned, and moved quickly to shore up its investment after media reports about BREIT’s difficulties.

They’re good for it: UC’s confidence in BREIT isn’t based purely on loyalty. Last year through November, BREIT returned 8.4%, outperforming many of its peers. Not to mention that over its six-year holding period, BREIT’s agreement with UC Investments ensures a minimum annualized net return of 11.25%, thanks to a $1B backstop from Blackstone (BX). While Blackstone isn’t the government, it is the largest asset manager in the world, so UC might as well have scored an 11.25% Treasury note.

➥ THE TAKEAWAY 

Brighter future: BREIT was originally created for wealthy individual investors to access the myriad benefits of private real estate. The wealthy are, however, proving to be less-than-loyal during recent volatility. This display of confidence from UC Investments is obviously a big thumbs up for BREIT, and should help in securing institutional capital going forward.

THANK YOU, NEXT!

Demand for Fannie & Freddie Loans Drops Despite Attractive Terms

Multifamily deals are falling apart left and right as investors struggle to secure attractive financing. However, Freddie Mac (FMCC) and Fannie Mae (FNMA) offer active, viable options for savvy investors looking for better terms. Problem is, not too many investors seem interested.

Close, but no cigar: While interest rates have run up, Fannie and Freddie haven’t increased the spreads (around 150–200 bps) that they add to their fixed-rate loans. In fact, all-in rates are still as low as 5.00–5.50%. Despite these attractive terms, Fannie and Freddie are unlikely to reach the lending caps set by the FHFA due to low demand for apartment loans.

Limited options: In contrast, many banks aren’t lending due to the higher-than-expected risk of their existing loans. Debt funds and CMBS loans are also fairly unattractive right now due to higher interest rates. Developers who need to refinance into permanent debt may face challenges with higher rates when the time comes.

➥ THE TAKEAWAY 

Stay on your toes: While rising interest rates and the possibility of a recession have caused a slowdown in multifamily, it’s weathered the storm far better than other CRE sectors. Investors who are able to meet affordability guidelines set by the FHFA should consider capitalizing on Fannie (FNMA) and Freddie (FMCC) financing before those attractive rates actually do go up.

A PRETTY PENNY

Hotel Experts Agree—The Money is Out There, But It’ll Cost You

Fears of looming debt maturities, a potential recession, and a risk-averse lending appetite towards CRE in particular could dampen the availability of financing for hotels. But according to hospitality industry experts, these fears are overblown. 

Green lights all the way down: As the Fed continues to hike interest rates into the latter half of 2023, expect the cost of capital for CRE deals to increase. Yet despite higher rates to come, Peter Berk, President of PMZ Realty Capital, expects the availability of financing for hotels to remain high. 

Yeah, what Munger said! Nearly $162B in CMBS loans—across all real estate sectors—is expected to mature in 2023. Lenders aren’t too concerned, as much of the maturing debt is from 2012 or 2013, reflecting tighter, post-GFC underwriting standards. All things considered, hotels are performing well right now and have been blessed with far lower operating expenses than they used to deal with.

➥ THE TAKEAWAY 

A relationship business: When you look at the bigger post-pandemic picture, the hospitality industry has tailwinds behind it and is in a much better place than it found itself in 2020 and 2021. Performing loans should be financeable, with banks willing to extend credit to existing borrowers. Expect regional and local banks to stay active, leaning more on their best relationships.

• Wake up & smell the cannabis: NY Governor Kathy Hochul announced that Housing Works Cannabis Co. will open NYC’s first dispensary, a 4 KSF facility at 1 Astor Place. 

• Higher and better use: DC Mayor Muriel Bowser calls on the White House to either get federal workers back into the office or allow the city to convert vacant offices into affordable housing.

• Sound the alarm: While everyone seems to be pushing for workers to get back into offices, demand for new office space in the US has fallen to just 44% of 2018 and 2019’s levels.

• A bumpy ride: CBRE (CBRE) and JLL (JLL) have announced major layoffs, with others like Cushman & Wakefield (CWK), Colliers (CIGI) and Newmark (NMRK) likely to follow suit. 

• The Art of The Deal: Former President Trump’s 2018 tax returns show generous use of real estate losses to help offset large operating profits. 

• Sorry, aspiring homeowners: Analysts expect the 30-year fixed-rate mortgage, which hit 6.42% last week, to keep going higher. But at least home prices are going down.

• The keys to the kingdom: UBS (UBS) Realty just gave back the keys to the Galleria Mall in Dallas to its lender, MetLife Investment Management (MET).

• Not cool, Mr. Musk: Twitter (TWTR) was sued by its landlord for failing to pay December rent for its office in San Francisco. Elon Musk, who ordered the nonpayment, probably doesn’t care.

• Chef Curry: Chicago-based CRG is proposing the construction of Curry Road Apartments, a six-story, 347-unit apartment complex in Tempe, AZ.

• The Two Towers: Two Trees Management has secured a $364M loan from JPMorgan (JPM) to complete the construction of two residential towers at 346 Kent Avenue in Brooklyn.

• Have a Goodyear: Phoenix Investors has acquired the former Goodyear Tire & Rubber Company (GT) facility in Gadsden, AL, with plans to divide the space among multiple tenants.

• Flying Hyatt: Cushman & Wakefield (CWK) has brokered the sale of a 127-room Hyatt (H) hotel in Gilbert, AZ, to HWC Hospitality for nearly $19.5M.

• Going shopping: Unibail-Rodamco-Westfield (UNBLF) has sold two shopping centers in CT and NY for $196M. Not too bad.

• What were they thinking?: Brookfield (BAM) and China Investment Corporation pulled the $1.4B listing for 1 Water St. in NYC due to rising interest rates and reduced bank lending.

• For the children: Providence sold the Southgate Campus and Valley Office Park, totaling 484 KSF, to Seattle Children’s Hospital for $84M.

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Renters in the US are finding it harder to afford housing than homeowners, according to data from the US Census Bureau. Right now, renters spend an average of 33% of their income on housing costs, while homeowners spend just 22%.

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.