Blackstone Mortgage Trust, a subsidiary of one of the world’s biggest landlords, has downgraded two of its Silicon Valley office loans, citing tech’s real estate pullback.
The publicly traded company originates commercial real estate mortgages and is managed by its namesake parent Blackstone, which has more than $1 trillion in assets.
The loans are tied to two office buildings and the downgrade occurred due to rising interest rates and an office downturn fueled by tech’s embrace of remote work.
“We have one in San Jose, one in Silicon Valley. Both very nicely, recently renovated, very high-quality assets,” Blackstone Mortgage Trust CEO Katie Keenan said in an earnings call Wednesday. “But as I think I mentioned in the Q&A, tech, which is 40% of the market in San Francisco, has just been really challenged in terms of office use. It’s by far the biggest driver of negative net absorption across the country.”
Blackstone Mortgage Trust declined to provide further details on the exact building addresses, square footage or values. The loans represent less than 1% of the company’s portfolio.
Keenan said tech’s pullback has hurt the local economy. The industry has tried to give up millions of square feet of Bay Area office space through sublease listings and lease cancellations, and also laid off hundreds of thousands of workers globally in the past year.
“There’s a pretty big difference between tech and any other industry. And San Francisco has just always been kind of a company town. So we see historically in San Francisco, it’s sort of a boom-and-bust cycle. When tech is working, it’s extremely positive for the market. And when tech is pulling back, it’s an overhang,” Keenan said.
She also referenced “quality of life issues,” but didn’t elaborate. Residents have long complained about high housing costs, homelessness, drug use and crime. Keenan is based in New York, where Blackstone is headquartered, according to the company’s website.
“You also have some quality-of-life issues, but I think there’s a lot of focus on addressing, but will take time because of the way the sort of political system works in San Francisco and the Bay Area,” she said. “So that’s really what was driving most of the challenges with those assets. We do feel good about the long-term performance of that market.”
“It’s really been a very cyclical market, and tech as a whole, we believe in, and we believe in San Francisco,” she said. “But it’s going to take time.”
A third office loan tied to a “small” Chicago deal was also downgraded, she said.
Blackstone is no stranger to distressed real estate during the pandemic. The parent company said a San Francisco property called North Park, that it bought in 2018 for $245 million, is now worth less than a $150 million loan on the property. Sources said the building is likely to sell for around $90 million.
Last month, Blackstone also sold 600 Townsend St. in South of Market for $25 million, half of the $50.5 million that it paid seven years ago.
Separately, Blackstone President Jonathan Gray said in an earnings call last week that the company’s QTS data center real estate holdings have benefited from the artificial intelligence revolution. The company has also invested in student housing.
“BXMT continues to deliver for its shareholders, generating strong earnings amidst a challenging backdrop and supporting our attractive and consistent dividend. We believe the steps we have taken to proactively manage the portfolio and our balance sheet position us well to navigate volatility and capitalize on an opportunistic environment ahead,” Keenan told the Chronicle in a statement.
Reach Roland Li: roland.li@sfchronicle.com; Twitter: @rolandlisf
