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Private-equity giant Blackstone (NYSE: BX) recently acquired $2 billion in discounted commercial real estate loans. The company has been aggressively buying commercial loans for much of the last two years, and the latest acquisition brings the total value of its shopping spree to $20 billion.
Blackstone bought these loans from Richmond-based lender Atlantic Union Bankshares (NYSE:AUB). Although most of the loans are performing, Atlantic Union made them before interest rates started increasing, which has significantly diminished their value. Blackstone was able to use the loan’s decline in value to negotiate a 7% discount off their face value.
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Buying discounted commercial loans is one of Blackstone’s major profit centers, and the current state of the commercial market is creating ample opportunity for Blackstone to make new acquisitions. The runup in interest rates has put many regional lenders in a difficult position. Many of them began lending aggressively in the commercial sector after the 2008 financial crisis led the Federal Reserve to dramatically lower interest rates.
They viewed commercial loans as safer than residential loans, and the size of the deals made them extremely profitable in the short term. Many banks got overextended, although they didn’t necessarily realize it until the Federal Reserve began rapidly raising rates after the COVID crisis. The crisis caused vacancy rates to spike, which led commercial real estate owners to lower rents. Together, these factors drastically reduced property values and investor returns.
The kick-on effect for commercial lenders is that many of them found they were holding loans on properties that were upside down. Several regional banks went under because the unrealized losses in their commercial loan portfolios exceeded the bank’s total assets. Other banks sought to prevent that possibility by selling off large tranches of their commercial loan portfolios at a discount.
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That’s where Blackstone comes into the equation. Blackstone’s most recent purchase comes on the heels of Atlantic Union’s April merger with Maryland-based regional lender Sandy Spring Bancorp. A majority of the discounted portfolio Blackstone purchased consists of loans that originated with Sandy Spring. According to the Journal, discounting Sandy Spring’s portfolio was a condition of the merger agreement.
