Blackstone Inc., the giant alternative investment management company with almost a trillion dollars in AUM (assets under management), recently restricted investors from redeeming or cashing out their BREIT (the Blackstone Real Estate Income Trust) fund because the fund didn’t have enough liquidity.

That’s a problem – not only for investors who wanted their money back, but for real estate in general.

Real estate has historically been a popular choice for people who want to go long and avoid the volatility of the stock market, and under normal circumstances is a pretty reliable way to grow wealth over time.

But the circumstances we’re in are anything but normal. Rising interest rates are driving up the price tag on financing real estate investments, and demand from new buyers has cooled significantly. In addition, the renter’s market, which blossomed during the pandemic, is now starting to wither away to levels we haven’t seen in over a decade.

All this suggests that there’s a reckoning coming in this space. And what happened with Blackstone is a sign of things to come.

As always, that also means there’s an opportunity for us to strike while the proverbial iron is hot and position ourselves to profit while we wait for the inevitable to occur.

Let me walk you through what happened with BREIT, who helped bail them out and why, what’s coming next for the real estate sector, and how we’re going to turn that to our advantage.

What Happened with Blackstone
Real estate investments are notoriously illiquid. Because they’re long-term assets that don’t generally throw off a ton of cash, exiting them can be a problem for investors who want their money back. In the case of the BREIT fund, with $69 billion in assets, there wasn’t enough cash to meet a flood of redemption requests starting early in the third quarter of 2022.

Investors fearing rising rates would impact Blackstone’s real estate assets rushed for the exit doors in Q3, wanting to redeem $8.85 billion of their BREIT holdings. That’s almost 13% of the fund’s AUM. The outflows a year ago over the third quarter of 2021 were only $822 million.

The fund has a 2% redemption cap of NAV (net asset value of assets under management) per month and a cap of 5% over any calendar quarter. Redemption requests blew through those caps.

By the first of December 2022, Blackstone, scrambling to raise cash to meet redemptions and not sully its reputation, inked a deal to sell their interests in MGM Grand and Mandalay Bay assets out of BREIT for close to $5.5 billion to Vici Properties. BREIT bought interests in those assets in January 2020. They probably never expected they’d have to offload them so quickly at a price much lower than desirable. But Vici had the money and stepped up, and Blackstone took it.

That wasn’t enough. A month later, in the first days of January 2023, Blackstone announced a $4 billion investment in BREIT courtesy of the office of the CIO of the Regents of the University of California.

Though that sounds like a lot for the University system to invest in BREIT, it’s only 2.6% of their $150 billion AUM. And what they got in return was well worth it. Blackstone contributed $1 billion of their holdings to support an 11.25% minimum annualized net return over the 6-year hold period.

Those are tough terms if you’re Blackstone, who’s used to borrowing at rock-bottom rates. What it says about how expensive it is to finance real estate investments in a rising rate environment, with liquidity constraints mounting, is a warning sign to real estate investors.

About 78% of the BREIT portfolio is “composed of rental housing and industrial assets.” The thing about rental housing is it’s experiencing something of a reversal of fortunes.

The Implications of the Rental Market Decline
Private equity companies like Blackstone enjoyed the good fortunes in the rental market. They had been buying up residential properties with gusto since the 2008 housing market collapse. When the pandemic struck, they grabbed even more rental units thanks to the uptick in single-person households seeking rentals.

But that’s changing. According to Apartment List, the fourth quarter of 2022 saw rents fall 0.9% each month. Typically rents grow by 3% annually, so the 2.7% fall in rental rates in just three months was a shocker. New lease demand over the second half of 2022 was negative over the entire year, something rental housing economist Jay Parsons says hasn’t happened since 2009.

And while lower housing rental costs will help lower the inflation rate, it will not serve residential multi-family and apartment complex builders.

The national apartment vacancy rate in December was 5.9%. That’s ticking up as more apartment buildings are under construction than at any time in the last 50 years.

Here’s How to Play It
When we look at homebuilder stocks like LGI Homes Inc (LGIH) or Lennar Corp (LEN), it’s easy to think the worst may be behind us, as most of them have rebounded, some robustly. But that’s a dangerous assumption.

The stocks of homebuilder supply companies (like Summit Materials, Inc (SUM) or Masonite International Corporation (DOOR)) aren’t enjoying the same bounce, nor are residential REITs or the stocks of apartment builders and community developers (like Sun Communities, Inc (SUI) or Equity Residential (EQR)). In fact, most of those are still declining.

The goings on at BREIT are the canary in the coal mine. That means the homebuilder stocks are ripe for profit-taking before things get worse, and other housing supply-related stocks and rental housing stocks are headed lower. As usual, puts and put spreads will get you exposure here with the lowest amount of risk, and allow you to make a tidy profit as they sink.

We’re targeting a bunch of these companies in my subscription service. If you aren’t hearing that canary sing, and you’re not, you know bad stuff is leaking out of the market for real estate assets. There’s money to be made on further weakness, especially if the soft landing so many people now expect for the economy ends up being a crash landing that leads to recession.

You’ve been warned.

— Shah Gilani

Source: Total Wealth