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Blackstone Rocking CMBS Market with Pair of Big Financing Deals

Single Borrower Securitization Driving Activity; Giant PE Firm Accounts for More Than One-Third of Those Deals
October 9, 2017
The Pinnacle I in Burbank, CA, will help secure a new CMBS offering backing an ew Blackstone acquisition.
The Pinnacle I in Burbank, CA, will help secure a new CMBS offering backing an ew Blackstone acquisition.
September capped off another active month for commercial mortgage securitizations with single borrower deals driving growth.

Year-to-date CMBS issuance now stands 40% higher compared to this time last year. The majority of that activity is the result of single-borrower deals, which are up 117%, while conduit CMBS lending is up just 10%, according to Morgan Stanley Research. Projected annualized issuance should now easily exceed last year’s deal flow.

Driving that single-borrower surge are deals tied to one firm: Blackstone Group (NYSE:BX). CoStar news counts 54 single-borrower CMBS deals this year totaling $32.8 billion, including seven multifamily deals from Freddie Mac. Of those 54, Blackstone affiliates are the borrowers in 13 of the cases totaling $10.6 billion in deal issuance.

That represents a sizable increase for the private equity giant, which last year was involved in just three CMBS deals totaling $3.24 billion.

And the New York-based PE fund has two more CMBS deals in the works financing its two most recent purchases.

Deutsche Bank and UBS Securities are preparing an offering secured by mortgages on Blackstone purchase of six Class A office properties in Burbank, CA. For the second financing, Citigroup is leading an offering secured by Blackstone’s recent purchase of the International Market Centers in North Carolina and Nevada.

"Big deals always go the CMBS market," said Richard Hill, executive director of Morgan Stanley Research. "That's because life insurance companies usually don't like to partner together, and their bite-size is typically limited to around $300 million to $400 million. Anything larger than this typically finds its way to CMBS."

CMBS borrowing also comes with relatively low interest rates and offers investors access to higher quality assets and increased transparency, other analysts said.

Momentum in single-borrower deals is expected to drive issuance of commercial mortgage-backed securities in the fourth quarter too, according to Morningstar Credit Ratings, with most of those deals backed by office properties or hotels.

Despite the widespread expectation that interest rates will rise, strong investor demand for office buildings in major markets is keeping capitalization rates low as the market enters the fourth quarter.

As interest rates rise, the trend of lower office cap rates is expected to reverse, but that won’t happen until next year, according to Morningstar. Office building investors have benefited from a combination of limited construction, lower cap rates and increased net operating income to drive valuations sharply higher since 2010, according to Morningstar.

Blackstone Buys Burbank Office Properties
In the first of the two new CMBS securitizations involving Blackstone, affiliates of the company are buying control of a Burbank Media District office portfolio. The deal includes control of 3800 W. Alameda Ave. and 3821 W. Riverside Dr. purchased for $172.5 million from affiliates of Worthe Real Estate Group. Worthe has retained an ownership stake in the properties and will continue to manage them for Blackstone.

The deal also included Hudson Pacific Properties’ (NYSE: HPP) 65% ownership in the Pinnacle I at 3400 W. Olive Ave. and II at 3300 W. Olive. Blackstone agreed to pay $227.5 million, including the assumption of $216 million of project-level financing, valuing the buildings at $350 million. That portion of the deal is expected to close by Nov. 1, 2017.

[Editor's Note: The above paragraph was edited Oct.12. An earlier version incorrectly stated that Blackstone was to pay $350 million for the 65% share.]

Reports also indicate the sale included 2900 and 3500 W. Alameda Ave.

Blackstone’s purchase of the six office properties, with a combined total of 3.3 million square feet, values the portfolio at a reported $1.7 billion.

Blackstone Completes Acquisition of International Market Centers
Late last month Blackstone funds also completed the previously reported acquisition of International Market Centers Inc. from Bain Capital Private Equity and funds managed by Oaktree Capital Management. Fireside Investments also partnered with Blackstone on the acquisition.

Mortgages financing that estimated $1.5 billion purchase will make up the other CMBS securitization for Blackstone expected during the fourth quarter.

IMC is the world's largest owner and operator of showroom space for the furniture, home decor and gift industries, with 12.2 million square feet of exhibition space in High Point, N.C. and Las Vegas.
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