Two funds controlled by a couple of the world's largest real estate investors, Blackstone Real Estate Income Trust and Brookfield Real Estate Income Trust, ended 2023 with their worst annual performances as higher interest rates have upended the commercial property industry.

Blackstone REIT, a fund for wealthy investors, reported a 0.5% loss in 2023 following a 1.2% loss in December. That compared against the 10.6% average annual increase Blackstone BREIT has posted since its start in 2017, its yearly returns show.

Brookfield REIT showed a wider negative return of 6.7%, which a review of its results show is its first annual loss since its start in 2019. Last year the REIT posted more monthly losses than gains. In contrast, it produced annual gains for investors between 10% and 23% in 2020, 2021 and 2022.

The results reflect the fast pace of interest rate increases through early last year that caused investors to hold back on buying property or refinancing with far higher borrowing costs than just a year earlier. Those higher costs cut into potential returns and both REITs focus on income-producing properties, with Blackstone REIT run by Blackstone Group in New York and Brookfield REIT controlled by Toronto-based Brookfield Asset Management.

Blackstone REIT, which has had to limit shareholder redemptions over the past year, said those requests have slowed significantly. It received $1.1 billion in redemption requests in December, 41% lower than November and 80% lower than the January 2023 peak, the REIT said in a letter to shareholders.

That REIT also said its loss was a result of “a sharp decline” in interest rates that led to a reduction in the value of its hedges against those rates that ended up hurting December returns. It said its real estate properties actually posted positive performance in both December and all of last year. “Lower interest rates, if sustained, should be a long-term positive for real estate values,” the REIT said.

In an email to CoStar News, a Blackstone spokesperson said the REIT “has delivered an 11% annualized net return ... since inception seven years ago, approximately 2x publicly traded REITs, making it one of the best performing REIT investments through the pandemic and this period of rising rates.”

A Brookfield spokesperson didn’t immediately respond to an emailed request to comment.

More than half of Blackstone REIT’s investment sectors are those with high-single-digit or bigger rent growth in fast-growing Sun Belt markets, it said. Investments in data centers and student housing make up 19% of the REIT’s exposure.

Meanwhile, the decline in interest rates, where the 10-year U.S. Treasury has dropped 1 percentage point to 4.07% from its 2023 peak, also bodes well for Blackstone REIT, it said. The REIT added that declining new supply and construction starts in key sectors promise “pricing power.” It also said it’s “playing defense” by recently buying defunct Signature Bank’s senior mortgage loan portfolio at a discount of about 30%.

Blackstone REIT’s portfolio includes American Campus Communities rental housing Blackstone bought in 2022 and QTS Data Centers it bought in 2021, according to the REIT’s website. It has cut back its exposure to office properties.

Brookfield REIT, for its part, has said higher interest rates have hurt its performance.

With rate hikes “now largely behind us,” the REIT said it expects performance going forward will be driven by its “strong operating performance and not negative valuation metrics.”

As of Dec. 31, Brookfield REIT’s portfolio included 89% real estate properties and 11% real estate-related loans and securities.

Among its real estate, rental housing made up about 64%, followed by net-lease properties with a 25% share. Logistics properties made up 6% of the portfolio with office buildings at 5%.

Brookfield REIT’s portfolio includes the 490-unit Briggs + Union apartments in Mount Laurel, New Jersey, and the 360-unit Parker at Huntington Metro rental housing complex in Alexandria, Virginia.