Blackstone vs Starwood: Diverging US Property Market Views

Key Takeaway

• Blackstone sees the US commercial real estate market bottoming, citing peaking interest rates and slowed new construction.
• Starwood Capital anticipates a significant distressed cycle ahead due to underwater loans in bank portfolios.
• Global real estate transactions hit a low at $130 billion in Q1 2024, with US property values down 21% from early 2022 peak.

Diverging Views on US Real Estate

Two of the world's largest property investors, Blackstone Inc. and Starwood Capital Group, offer contrasting perspectives on the US commercial real estate market's current cycle. Blackstone, with approximately $600 billion in global property assets, sees the market reaching a bottom, buoyed by a peak in interest rates and a slowdown in new construction supply. Kathleen McCarthy, Blackstone's global co-head of real estate, suggests that while negative impacts are anticipated, they represent the aftermath of prior challenges. Conversely, Starwood Capital, managing $115 billion, predicts a distressing period ahead, particularly for banks, due to loans made at higher interest rates now being underwater. Barry Sternlicht, Starwood's Chairman, anticipates a significant distressed cycle on the horizon.

Global Real Estate and Private Credit Strains

The global real estate market has experienced a downturn, with transactions declining for seven consecutive quarters to the lowest level since the 2011-12 post-financial crisis period, as reported by MSCI Real Assets. This decline, triggered by central banks' rate hikes since 2022, casts uncertainty on property valuations. In the US, real estate values have stabilized somewhat, but overall asset values have dropped 21% from their early 2022 peak. The looming refinancing needs of a record $929 billion in commercial-property debt add to the sector's challenges. Additionally, the private credit market faces stress from sustained high interest rates, affecting borrowers and lenders alike. Moody's Ratings highlights deteriorating credit quality among fund managers, with major firms like BlackRock Inc. and KKR & Co. experiencing downgrades due to increased non-accrual loans.

Leveraged Finance Market Shifts

The leveraged finance market is undergoing significant changes, with healthier companies opting to refinance their private credit debt through more affordable bank loans. This shift leaves direct lenders catering to weaker and smaller companies, necessitating concessions on price, terms, and provisions. Moody's notes this period as the most competitive in the leveraged finance market's history, with the weakest terms observed. The migration from syndicated market refinancing to private credit raises concerns about potential distress among borrowers.

Street Views

• Kathleen McCarthy, Blackstone (Cautiously Optimistic on US real estate):

  "There’s bad news coming, but it’s the aftermath of the shipwreck that’s already happened."

• Barry Sternlicht, Starwood Capital Group (Bearish on US real estate):

  "There’s a huge distressed cycle ahead of us."