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Facing Possible Cash Crunch, Giant Real Estate Fund Limits Withdrawals

A giant real estate fund managed by the company of the billionaire investor Barry Sternlicht is limiting the amount of money that investors can redeem, in an attempt to fend off a potential cash crunch as high interest rates pummel the market for commercial properties like office buildings.

Starwood Real Estate Investment Trust, which manages about $10 billion and is one of the largest REITs around, said on Thursday that it would buy back only 1 percent of the value of the fund’s assets every quarter, down from 5 percent earlier.

Starwood said that it had chosen to tighten the limit because it was facing more withdrawals than it could meet with its cash on hand, and that it was a better option than raising money by selling properties at discounted prices. The value of commercial properties has fallen — hit both by lower occupancy since the coronavirus pandemic and by high interest rates that make real estate less affordable.

In a letter to shareholders, Mr. Sternlicht, who leads the Starwood Capital Group, and Sean Harris, the chief executive of Starwood’s REIT, said: “We cannot recommend being an aggressive seller of real estate assets today given what we believe to be a near-bottom market with limited transaction volumes, and our belief that the real estate markets will improve.”

Any such gates tend to spook investors.

“This will have a negative effect on fund-raising,” said Kevin Gannon, chief executive of the investment bank Robert A. Stanger & Company, which follows the REIT market. “I think it will give people more pause.” He added that “no one anticipated that redemptions would stay this big this long.”

Real estate investment trusts buy and own commercial or industrial properties and generate dividends for investors. They are typically publicly traded entities. But the Starwood REIT and one created by the private equity behemoth Blackstone are privately held and instead sold by financial advisers, mostly to individual investors. Some churn is normal in the business, as investors make decisions about what to buy and sell.

The trouble starts when a REIT doesn’t have enough cash — or fears it won’t — to pay investors back, usually because the rate of withdrawals is higher than the amount of money coming in. In recent months, investors have sought redemptions so they can put money into other assets that tend to perform better in high-interest-rate environments.

Private equity funds and other major real estate firms have raised tens of billions of dollars from individual investors to pour into real estate. But since the Federal Reserve started its campaign to raise rates two years ago, this once-booming market has been running into trouble.

Rising interest rates hurt the real estate market because they lead to higher mortgage rates and higher monthly costs for owning real estate. Plus, with fewer employees going into the office since the pandemic, companies that lease office space have cut back — hobbling cash flows used to pay back loans. Some building owners have handed properties back to lenders, and others have been forced to sell buildings at steep discounts.

Starwood also told investors that it would cut its management fees.

Starwood’s isn’t the only REIT to face challenges. Blackstone, whose REIT, known as BREIT, has nearly $60 billion under management, also faced a high level of withdrawal requests in late 2022.

To give itself some breathing room, Blackstone struck a deal with the University of California’s investment arm, UC Investments, to give BREIT more cash on hand. In January 2023, UC Investments put in roughly $4.5 billion. Since then, redemptions have gone down, and in the last three months, Blackstone said, it has been able to fully redeem investors.

On Thursday, Blackstone sought to assuage the fears of its investors. It told BREIT shareholders that it had no plans to change their terms, in a memo titled: “Business as Usual for BREIT.”

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