Why Blackstone’s $69 Billion Property Fund Is Signaling Pain Ahead for Real Estate Industry

Pain is deepening across the US real estate industry.

Two of the biggest players — Blackstone Inc. and Wells Fargo & Co. — took steps this week to contend with weaker demand as the industry faces a rapidly cooling property market, rising interest rates and waning investor appetite.

The well-heeled investors in the $69 billion Blackstone Real Estate Income Trust Inc. learned Thursday the fund will limit withdrawals as people seek to pull money from what’s been a cash magnet for one of the largest owners of real estate globally. Also Thursday, Wells Fargo, the biggest home loan originator among US banks, confirmed it’s cutting hundreds more mortgage employees as soaring borrowing costs crush demand.

The $69 billion BREIT will be limiting withdrawals as headwinds hold back the real estate market. Photographer: Angus Mordant/Bloomberg

“It’s a one-two punch,” Susan Wachter, real estate professor at the University of Pennsylvania’s Wharton School, said in an interview. “Both are realistic pullback responses to the overall economic weakness we’re seeing now as well as the spike in interest rates.”

In the past decade, the real estate industry reaped the benefits of the Federal Reserve’s policy of low rates. Homebuyers, taking advantage of record-low borrowing costs, went on a spree that fueled double-digit price gains. Ultra-low rates also drove a refinancing boom that put more money in homeowners’ pockets and spurred the creation of jobs for mortgage brokers, title insurance agents and appraisers.

Now, real estate has been among the hardest-hit sectors of the Fed’s campaign to quash inflation by boosting interest rates at the fastest pace in decades.

In the housing market, mortgage rates that have doubled this year are sidelining potential buyers and causing sellers to pull back on new listings. A measure of prices has dropped for the last three months, while pending home sales have fallen for five months in a row. The volume of mortgages with rate locks plunged 61% in October from 2021 levels, according to Black Knight Inc.

Commercial real estate is also feeling the sting. Property prices have slumped 13% from a peak this year, according to Green Street’s October price index. The financing environment has become trickier as some big lenders have scaled back, leading property owners such as a Brookfield Asset Management Inc. unit to warn that it might struggle to refinance certain debt.