Starwood’s $10B REIT Caps Withdrawals Amid 21% Drop in Real Estate Values

Key Takeaway

• Starwood's $10 billion REIT, SREIT, tightens withdrawal limits to 0.33% of NAV amid liquidity concerns and mounting redemption requests.
• The move aims to avoid asset sales in a depressed market; management fees will be cut for six to 12 months.
• Commercial real estate values are down 21% from their peak, with higher rates making real estate less attractive compared to liquid assets.

Starwood's Liquidity Crunch

Billionaire Barry Sternlicht's Starwood Real Estate Income Trust (SREIT) is facing a significant liquidity challenge, prompting the fund to impose tighter limits on investor redemptions. The $10 billion fund, which has seen a surge in redemption requests, will now cap monthly withdrawals at 0.33% of its net asset value, a drastic reduction from the previous 2% limit. This move aims to preserve liquidity and avoid selling properties at depressed prices, reflecting the broader struggles in the commercial real estate market amid rising interest rates.

The Mechanics of the Restriction

The new redemption limits, which will likely last six to twelve months, are designed to prevent a fire sale of assets in a market that Sternlicht believes is near its bottom. SREIT had $752 million in available liquidity at the end of April, but with redemption requests totaling $518 million that month alone, the fund faced a critical decision. By reducing its management fees and capping redemptions, Starwood aims to align its interests with those of its investors, hoping to weather the current market downturn without significant asset sales.

Commercial Real Estate Market Dynamics

The commercial real estate market has been under pressure since the Federal Reserve began hiking interest rates in 2022. Property values have dropped by 21% from their peak in March 2022, leading many owners to seek loan extensions or other liquidity measures. SREIT's situation is exacerbated by higher interest rates, which make alternative investments more attractive to investors. This trend has forced SREIT and its competitors, like Blackstone Real Estate Income Trust, to enforce redemption limits and sell assets to maintain liquidity.

Broader Implications for Real Estate Funds

The challenges faced by SREIT highlight the broader issues in the commercial real estate sector. With interest rates expected to remain high, real estate funds are under increasing pressure to manage liquidity without resorting to asset sales at unfavorable prices. SREIT's decision to limit redemptions and reduce management fees is a strategic move to preserve value for existing investors. However, it also underscores the difficulties that real estate funds face in a high-interest-rate environment, where liquidity is scarce, and market conditions are challenging.

Street Views

• Jeff Langbaum, Bloomberg Intelligence (Neutral on real estate market):

  "They were wrong this year about rates coming down. This stretches out their liquidity in hopes that eventually, they’ll be right."

• Kevin Gannon, Robert A. Stanger & Co. (Cautiously Optimistic on SREIT's strategy):

  "Limiting redemptions was a better option than forcing asset sales in a bad market, and cutting its fee helps align management’s interests with investors... Being the first one to do it is tough. But it’s logical. Investors will get liquidity a little bit slower."

Management Quotes

• Barry Sternlicht, CEO of Starwood Capital Group:

  "This was a very hard decision to make, but having managed through six major downturns over our 30-year history, we believe we are making the best decision for all shareholders... We anticipate the real estate markets are bottoming and will continue to improve from here, so further leveraging the vehicle or selling our portfolio’s assets to meet monthly redemptions would negatively impact all investors."

• Barry Sternlicht and Sean Harris (SREIT Chief Executive Officer), Starwood Capital Group:

  "There is plenty of ‘dry powder’ to purchase real estate, but much of it remains on the sidelines as bid-ask spreads remain elevated, the sign of market not functioning properly."