Nontraded REIT sales tank in 2023

In the face of sharply rising interest rates, headlines about half-empty office buildings and investors pulling money from products, sales of nontraded real estate investment trusts fell hard this year, with the industry raising $9 billion through September after successive years of more than $30 billion in new capital.

According to Robert A. Stanger & Co. Inc., brokers and financial advisors sold $33.3 billion of nontraded REITs in 2022 and $34.4 billion in 2021. Popular nontraded, net asset value or NAV REITs — such as the Blackstone Real Estate Income Trust Inc. — raised just $331 million in September, compared to $2.15 billion in September 2022.

Nontraded REITs are public companies but aren't registered on any public exchanges and don't trade. The slide in sales is a turnaround for the nontraded REIT industry, which had seen tremendous success for several years after having been on its knees in 2016, when nontraded REITs faced criticism about excessive commissions amid new industry rules that made fees and pricing more transparent.  

Around that time, institutional managers like Blackstone revitalized the product and emphasized liquidity, or giving investors a better ability to withdraw a limited amount of capital out of the REIT each quarter.

By far the largest REIT in the industry, the $64 billion Blackstone REIT — known as BREIT — has a limit on redemptions, or the amount clients can sell back to the fund, set at 5% of net asset value per quarter or 2% per month. Last year, demand from investors to sell back shares outpaced the REIT’s limits, putting the company in headlines.

BREIT, for example, raised $6 billion through September, compared to $19 billion in all of last year. And investors are continuing to pull money out of the REIT through redemptions. According to Stanger research, the company had $10 billion in investor redemptions through September; in 2022, it had $9.7 billion in redemptions.

A spokesperson for Blackstone noted that the company historically has had a strong performance, and that investor requests to sell back shares — redemptions — to the company are slowing. "We were pleased to see October repurchase requests decline meaningfully from the January peak and to fulfill 56% of share repurchase requests in the month, the highest level since October 2022," the spokesperson wrote in an email.

Others in the market were sanguine about BREIT's future prospects.

Lodas Markets, a marketplace for illiquid alternative investments like nontraded REITs and business development companies, started trading BREIT earlier this year. Spreads have tightened on the product, particularly because financial advisors are interested in buying the company at a discount, said Lodas CEO Brian King.

"There have now been multiple trades in BREIT within 4% of NAV in the past month," King said. "That’s where current bids are, but that could change tomorrow. And that's newsworthy for us as, previously, trades were closer to 15% to 25% off NAV."

"Ironically, I think the redemption issue is the best thing to ever happen to nontraded REIT space," said Kevin Gannon, chairman and CEO of Stanger. "We never had liquidity like this. BREIT is making more than $1 billion of redemptions per month to the investors and they’re not blinking. As long as BREIT continues to meet redemptions up to the cap, management proves the efficacy of the product."

And market conditions could favor real estate next year, he added. While the fed funds rate is now at 5.50% after more than a year-and-a-half of interest rate increases to combat inflation, the market is expecting the Federal Reserve to cut interest rates next year.