Starwood REIT faces a potential cash crunch and limits withdrawals

A giant real estate fund run by billionaire investor Barry Sternlicht’s firm is limiting the amount of money investors can redeem, in an attempt to stave off a potential cash crunch as rising interest rates hit the market for commercial real estate such as office buildings.

Starwood Real Estate Income Trust, which manages about $10 billion and is one of the largest REITs, said Thursday it would buy back just 1 percent of the value of the fund’s assets each quarter, down from 5 percent earlier.

Starwood said it chose to tighten the limit because it was facing more withdrawals than it could meet with the cash it had on hand, and that it was a better option than raising money by selling properties at discounted prices. Commercial real estate values ​​have declined – impacted by lower occupancy since the coronavirus pandemic and higher interest rates that make real estate less expensive.

In a letter to shareholders, Mr. Sternlicht, who leads Starwood Capital Group, and Sean Harris, CEO of Starwood’s real estate investment trust, said: “We cannot recommend being aggressive sellers of real estate assets today given what we believe is a solid investment.” A market near the bottom with limited transaction volumes, and our belief that real estate markets will improve.

Any of these gates tend to spook investors.

Kevin Gannon, CEO of investment bank Robert A. “This will have a negative impact on fundraising,” said Stanger & Company, which tracks the REIT market. “I think this will give people more pause.” “No one expected recoveries to remain this large for such a long time,” he added.

Real estate investment trusts buy and own commercial or industrial real estate and generate profits for investors. They are usually publicly traded entities. But Starwood REIT, a real estate investment trust created by private equity giant Blackstone, is privately owned and is instead sold by financial advisers, mostly to individual investors. Some change is normal in business, as investors make decisions about what to buy and sell.

The problem starts when a REIT doesn’t have enough cash — or fears it won’t have enough — to repay investors, usually because the withdrawal rate is higher than the amount of money coming in. In recent months, investors have sought redemptions so they can invest the money in other assets that tend to perform better in rising interest rate environments.

Private equity funds and other major real estate companies have raised tens of billions of dollars from individual investors to pour into real estate. But since the Fed began its campaign to raise interest rates two years ago, this once-booming market has run into trouble.

High interest rates hurt the real estate market because it leads to higher mortgage rates and higher monthly costs of owning a property. Additionally, with fewer employees going into offices since the pandemic, companies leasing office space have downsized, crippling cash flows used to repay loans. Some building owners have returned their properties to lenders, and others have been forced to sell their buildings at deep discounts.

Starwood also told investors it would reduce its management fees.

Starwood isn’t the only REIT facing challenges. Blackstone, which manages its nearly $60 billion real estate investment trust, known as BREIT, also faced a high level of withdrawal requests in late 2022.

To give itself some breathing room, Blackstone struck a deal with UC Investments, the investment arm of UCLA, to give Britt more cash on hand. In January 2023, UC Investments committed approximately $4.5 billion. Since then, redemptions have declined, and in the past three months, Blackstone said, it has been able to fully recover investors.

Blackstone sought on Thursday to allay its investors’ concerns. It told BREIT shareholders that it had no plans to change their terms, in a note Titled: “Business as Usual for BREIT.”