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Blackstone’s president Jonathan Gray indicated that an improving recovery in the majority of the commercial property sector may not be sufficient to prevent certain heavily indebted owners from incurring losses, particularly with office spaces.
Gray expressed his belief that the commercial property market has hit its lowest point following a two-year decline driven by rising interest rates, and that values for most property categories are now on the upswing. Blackstone manages real estate assets valued at $603 billion globally.
However, some investors, who have hesitated to acknowledge declines in the value of office properties, may soon need to face write-downs, which could also impact lenders in some situations.
“The majority of the losses will occur in the equity market, but banks will also be affected,” he noted. “Is it possible for a regional bank to announce next month: ‘I must take a $500 million or $1 billion write-down’? Yes. There are still losses that will need to be addressed.”
Property owners often avoid accepting the diminished value of their assets until they are compelled to sell due to a debt deadline, leading to a gradual decline in prices that affects the market over an extended period.
“It requires time,” Gray explained. “Many of these buildings may be leased. The debt may be extended.”
Offices, representing 20 percent of commercial real estate, have experienced particularly significant price reductions as the impact of increased debt costs coincides with the growing trend of hybrid working.
The president of Blackstone, a seasoned real estate expert overseeing the private capital group’s daily operations, mentioned that more employees would return to office environments. However, he added: “It doesn’t seem like we’re reverting back to a five-day-a-week schedule. Thus, demand is lower.”
Despite commercial real estate debt levels being more manageable in recent years compared to the global financial crisis, Gray noted that some investors overlooked interest rate risks during the period of extremely low rates following the pandemic.
“When rates dip below a long-term natural rate — which they did post-Covid — mispricing that as a permanent scenario can be risky,” he remarked. “There are still transactions that carry too much leverage, notably office transactions.”
Nevertheless, he warned against interpreting negative reports about specific over-leveraged buildings as indicators of widespread weakness in the commercial real estate market.
“You’re going to hear . . . about those [properties] and people will claim values are declining,” Gray stated. “But that denotes past conditions. It’s a matter of differentiating the current challenges from the aftermath, which takes time to unfold.”
The general index of commercial property values compiled by analysts at Green Street increased by 3.3 percent in the year leading up to August. However, the index still sits 19 percent below its peak in 2022.
Gray had previously mentioned in January that the real estate sector was “bottoming out.” This year, Blackstone has intensified its acquisitions in real estate, aiming to invest in undervalued properties before prices increase substantially. The firm has substantial investments in warehouses, housing, and hotels, with a smaller stake in offices.
Investment managers have faced challenges due to a sluggish property transaction market, which complicates property sales and cash generation. Gray observed that a surge in buyers is already evident, predicting that the pace of larger transactions will accelerate in the coming months.
He anticipated that the momentum would be supported by real estate investment trusts (REITs) — publicly traded property companies.
“I foresee some REIT IPOs coming,” Gray said. “Additionally, I believe existing public companies will issue equity to sellers and/or engage in secondary offerings. I expect REITs to be quite active in acquisitions.”