Blackstone’s Real Estate Shopping Spree Is Now A Mortgage Default Crisis

The world’s largest alternative asset manager looks a little strapped for cash. Blackstone made headlines over the past few years for its real estate shopping spree. Deploying what seemed like unlimited capital, it bought everything in sight. Heck, they probably even outbid you for grandma’s home. That’s come to an abrupt end, as it defaults on hundreds of millions of its commercial mortgage-backed securities (CMBS), sending over $1 billion in mortgage debt into special servicing. 

Commercial Mortgage-Backed, Special What? 

Okay, let’s back the truck up—beep, beep, beeeeep. The terms CMBS and special servicing are terms the average person is unlikely to come across. If that’s you, the good news is you’re likely to be familiar with the concepts behind them. Let’s unpack those quickly.

A CMBS is a fixed income instrument backed by the mortgage on a property. Instead of the actual property, the claim is on the loan used for the real estate. It was a key tool during the buying boom in the mid-2000s. It also happens to be one of the major causes of the global financial crisis (GFC). Already not great, we know. 

After the GFC, the CMBS market was mostly stagnant. That changed in 2020, when the low rate boom hit. Everyone and their uncle wanted more real estate exposure, so a market was made. By 2021, CMBS issuance returned to the highest level since 2007. Don’t worry, it’s different this time. Until it isn’t, but moving on… in short, it’s a funding vehicle for real estate. 

Special servicing is also straightforward, and you’re likely familiar with similar concepts. When a borrower meets a very special CMBS, and defaults on payments, a special servicing is born. A special servicer is assigned, and restructures the loan. This can result in a payment plan, a penalty interest, or outright foreclosure. It’s kind of like a consumer proposal, but with obscene amounts of money.

Now that you’re a real estate genius, let’s get to those loans. 

Blackstone Has Defaulted On Over $1 Billion In CMBS

Let’s start with Blackstone’s Manhattan multi-family portfolio in mid-February. The institution defaulted on a $270 million CMBS

for several towers, adding up to 637 apartments. About 96% of the units are rented at market rate, with Manhattan rents surging recently. However, even those surging rents couldn’t prevent the loan from entering special servicing. 

A $562 million Nordic CMBS also defaulted. The instrument was used for property used by Sponda Oy, a Finnish company they bought in 2017. It’s a diversified portfolio of commercial properties primarily in the Helsinki-area. Not even surging Helsinki-land values provided much relief.

Blackstone might have had better luck at baccarat than real estate when it went to Las Vegas. Yesterday, the Commercial Observer reported the firm’s $325 million Hughes Center CMBS entered special servicing. Down the street, the firm disposed of its interest in One Liberty, valuing the property 30% ($500 million) below peak. 

Blackstone’s $71 Billion REIT Is Having Liquidity Issues

Ever lend someone cash, and they tell you they would totally pay you back but they need more time? If that person was a financial institution, that would be called a liquidity issue. They totally have your money, just wait here while they sell or raise some more.

Blackstone’s uber popular and massive $71 billion BREIT might have a liquidity issue. The firm halted redemptions for a fourth month, denying investor withdrawal requests. In January, investors tried to pull 25% of the trust’s value, with the equivalent of 2% fulfilled. February saw investors attempt to pull $3.9 billion, with just 35% filled.

The boom-bust situation is somewhat reminiscent of Anbang, China’s mega insurer. It had access to what seemed like unlimited capital, and one day it just didn’t. It eventually ended with the Chinese government taking control of the assets.

Blackstone is a classic case of excess leverage meeting the end of stimmy. It consumed as much leverage as it could, as quickly as it could while assuming it would never end. That isn’t to say they’re in trouble, per se.

One of the biggest perks to being the world’s largest alternative asset manager is your size. Blackstone doesn’t have a significant problem when it fails to pay the bills. Whoever was supposed to collect that payment is likely facing a bigger problem.

Like Anbang, if the problem gets too big, it becomes a problem for the state. Unlike Anbang, no one’s going to be in trouble if taxpayers have to pay to handle it.