Acquisition of AIR Communities is Blackstone’s largest transaction in the multifamily market
Blackstone has agreed to acquire an owner of upscale apartment buildings for about $10 billion, signaling that one of the world’s largest real-estate investors is ramping up investments again after a period of moving more cautiously.
Blackstone is taking private Apartment Income REIT, known as AIR Communities, which owns 76 rental housing communities that are primarily in coastal markets, including Miami, Los Angeles, and Boston, the companies confirmed Monday. Blackstone plans to invest another $400 million to improve the properties, the firm said.
The deal was reported earlier by The Wall Street Journal.
The acquisition is Blackstone’s largest transaction in the multifamily market. It reflects the firm’s bullishness on rental housing and its belief that commercial real estate overall is bottoming and the time is ripe to step up investments.
“We can see the pillars of a real-estate recovery coming into place,” Blackstone President Jonathan Gray said on an earnings call earlier this year. “We are, of course, not waiting for the all-clear sign and believe the best investments are made during times of uncertainty.”
The commercial real-estate market has been suffering its worst downturn since the 2008-09 financial crisis. Higher interest rates have hurt values of most property types because prices rise and fall depending on how much it costs to borrow.
Office-building vacancy is at record levels because more businesses are allowing workplace flexibility for employees. New supply has put pressure on apartment rents in many markets.
The forces together have caused commercial-property sales volume in the market to collapse. In the 12 months ending in February, investors bought $359.5 billion worth of U.S. commercial property, about half the deal volume of the previous 12-month period, according to MSCI Real Assets.
Many investors still aren’t ready to jump back into the market again. Prospective sellers might feel that prices will rise once the Fed begins cutting interest rates, which is expected later this year. But buyers often feel that prices still might fall further because of bearish trends at work in the commercial-property market.
“If I’m a seller, I’m holding out hopes that the Fed does as it’s signaling,” said Jim Costello, chief economist of MSCI Real Assets. “If I’m a buyer, I will underwrite every worst case before I jump in.”
What’s more, close to $820 billion of U.S. commercial property loans could mature in 2024, according to MSCI. Most owners wanting to refinance will face higher rates than those that they have been paying.
Real estate deal activity is expected to rise as more distressed investors are expected to capitulate and drop their prices or give properties back to their lenders. Numerous firms have been stockpiling cash for such opportunities.
Still, one sign has emerged that financing for real estate is improving: Nearly $18 billion of U.S. commercial mortgage-backed securities were issued in the first quarter this year, or roughly three times the volume for the first quarter last year, according to the trade publication Commercial Mortgage Alert.
Blackstone posted lower quarterly earnings in January, and its profit was hit by a decline in the value of its real-estate investments. The firm in recent months has begun to invest more aggressively in the commercial real-estate market, betting that interest rates are stabilizing and access to capital is becoming easier.
Blackstone late last year acquired a stake in a $17 billion real-estate loan portfolio from the defunct Signature Bank. In December, Blackstone and Digital Realty agreed to create a new venture to develop $7 billion in data centers that will target the largest providers of online content, cloud services and artificial intelligence.
Earlier this year, Blackstone agreed to acquire Tricon Residential, which owns, operates and develops a portfolio of about 38,000 single-family rental homes in the U.S., for $3.5 billion.
Investors such as Blackstone are beginning to see opportunity because they consider the properties held by some companies to be worth more than where the stocks are trading in the public markets, said John Pawlowski, an analyst at real estate analytics firm Green Street. “The public market has probably overshot,” Pawlowski said. “It’s gotten too negative.”
Blackstone agreed to acquire AIR Communities at a 25% premium to the company’s closing share price on Friday. Shares of AIR Communities rose more than 22% to $38.38 on Monday. Blackstone shares were up 1.36% to $129.32.
Blackstone is acquiring the firm through its $30.4 billion global real-estate fund, in a transaction valued at about $10 billion, including the assumption of debt. It is expected to close in the third quarter.
Blackstone considers multifamily, and rental housing in general, one of the best commercial property segments to invest in. While a crush of new supply, especially in the Sunbelt region, and higher interest rates have weighed on the multifamily business, the markets in AIR Communities portfolio have been less impacted.
