Billion-Dollar-Plus Investment Fund to Target Crushing Commercial Property Debt

The Blackstone Group is recruiting investors to contribute to a new billion-dollar-plus investment fund targeting the massive pools of debt backing commercial properties in the United States. The commercial real estate firm hopes to raise additional cash to invest alongside two other vehicles—the Blackstone Real Estate Special Situations Fund and another separate account managed by Blackstone. The two funds have already committed $1.3 billion in capital. committed.

Blackstone said it plans to invest in both senior and junior tranches of debt backing commercial properties—mostly office, retail, and multi-family locations that were highly leveraged in recent years. Many of those properties increasingly declined as the economy worsened. And, those plunges have put thousands of landlords in jeopardy of defaulting on debts set to mature in the months ahead.

Blackstone wants to target slices of debt that are most likely to retain value—even if the property backing that debt falls into foreclosure or suffers further pricing declines. The firm also plans to fill the void left by traditional lenders—mostly banks—since the financial crisis hit in 2008. The new investment vehicle would also be used to originate loans and refinance properties struggling to find relief from their maturing debt loads.

Blackstone estimates some $3.4 trillion in commercial real estate debt is scheduled to mature before 2018. And real estate experts say that Blackstone’s strategy makes sense, given the market’s problems. However, Blackstone is not the only investor among a growing crowd that is looking for value in the commercial real estate market.

Blackstone is already one of the largest commercial real estate owners in the country, having scooped up huge portfolios of U.S. trophy properties using its own funds and through acquisitions such as its $39 billion deal for Equity Office Properties Trust in 2007.