On Thursday, Blackstone Inc. announced a 36% drop in first-quarter distributable earnings compared to the same period last year.
The company attributed this contraction to a weak commercial real estate market. On the other hand, its credit and insurance funds performed better during the same period. Blackstone experienced a decline due to the decrease in the value of its real estate investments. During the first quarter of 2023, $4.4 billion in real estate assets were disposed of by Blackstone, compared to $9.5 billion in exits during the same period in 2022. The capital fresh deployments in the real estate sector also experienced a decline, from $7.5 billion in the first quarter of 2022 to $2 billion in the first three months of this year, according to the data.
The commercial real estate industry, valued at $20 trillion, has been facing a significant decline after decades of thriving growth supported by low-interest rates and easy credit. Since the pandemic, office and retail property valuations have been on the decline due to lower occupancy rates and changes in how people work and shop. The Federal Reserve’s actions to combat inflation by raising interest rates have also had a negative impact on the credit-dependent industry.
Blackstone Failed to make payment on its bond
Before this, Blackstone failed to make a $562.5 million payment on a real estate bond in March, as reported by Wion. The value of European properties has been affected by rising interest rates, causing the company to default on a $562.5 million bond backed by a portfolio of offices and stores owned by the Finnish company Sponda Oy. Despite Blackstone’s request for an extension to repay the debt, the bondholders declined, leading to the default.
Why commercial real estate is in trouble?
Companies have realized that employees can be just as productive, or even more productive when they work from home. This realization has caused a decrease in the demand for large office spaces, which in turn has affected the commercial real estate market. Furthermore, the rise of e-commerce has led to a decline in demand for brick-and-mortar retail spaces, which has had a further impact on the CRE market.
In addition to these factors, the oversupply of commercial real estate has also contributed to the collapse of CRE. Developers have built more commercial properties than the market can support, resulting in an excess supply of properties. Consequently, the value of these properties has decreased, and many investors are struggling to sell or lease their properties.
However, the most significant factor contributing to the collapse of CRE is the series of rate hikes that the Federal Reserve has implemented. Since the beginning of 2022, the Federal Reserve has raised interest rates seven times in an effort to combat inflation in the US economy and make borrowing more expensive for businesses and consumers. The hikes have ranged from 25 basis points to 75 basis points each time. Federal Reserve Chair Jerome Powell has announced that interest rates will continue to increase until inflation reverts to the annual 2% target.
Read More About Commercial Real Estate Crash:
Commercial Real Estate Lenders See Drastic Size Reduction
Challenges Loom as $900B in US Commercial Real Estate Loans Approach Maturity
Commercial Real Estate (CRE) Market Plunges into Meltdown as Investors and Lenders Recoil
The Commercial Real Estate Bubble Has Finally Burst
