Nervous investors are pulling money from commercial real estate

Even while it is not yet a run, nervous investors are starting to pull money out of commercial real estate in increasing amounts.

Some parts of the commercial real estate (CRE) market, like industrial and healthcare, are doing well, but investors are worried about office and retail.

These worries are getting worse because interest rates are going up. In response, investors are taking steps to limit how much they invest in the CRE market.

The Wall Street Journal says that investors are trying to pull their money out of real estate investment trusts (REITs). Blackstone Inc. (NYSE: BX) said that it would make it harder for people to get their money out of its $69 billion fund. Starwood Capital Group, a subsidiary of Starwood Property Trust Inc. (NYSE: STWD), has also made it harder for investors to leave its $14.6 billion fund.

Blackstone and Starwood, which are nontraded REITs, have put a limit on how much money investors can take out, but they still paid out $3.7 billion in the third quarter. Even though nontraded REITs can limit withdrawals on a monthly or quarterly basis, investors could end up having to sell other assets to pay for withdrawals if the current trend continues.

An analysis from Robert A. Stanger & Co., Inc. is quoted in the WSJ. It says that the number of withdrawals is 12 times higher than it was during the same time in 2021.

Nat Kellogg, president and director of manager search at investment firm Marquette Associates, told the WSJ that this makes prices go up overall.

He also said that more pension funds and university endowments that his company works with are thinking about pulling money out of real estate funds.

The Financial Times says that Blackstone's problems started in the spring and summer, when Asian investors started pulling money out of the company as property markets fell. The Financial Times also said that in July, investors took out more than 2% of the net assets of the trust. In response, Stephen Schwarzman, the CEO of Blackstone, and Jon Gray, the president and chief operating officer of Blackstone, each put $100 million of their own money into the trust.

Investors are now looking at less risky options like bonds, which pay higher returns than real estate funds and are easier to get into and out of than CRE. Investors switched from bonds to real estate funds because they paid less in interest. But since the Federal Reserve has raised interest rates more than once this year, many people are going back to bonds.

The withdrawals are also a strong sign that investors are worried about the uncertain future of CRE, especially office space, which hasn't recovered from the mass exodus of workers caused by the pandemic.