A $270 million Blackstone Group floating-rate loan backed by 11 Manhattan rental properties has gone into special servicing, the latest sign higher interest rates and inflation are combining with the pandemic's fallout to pressure even some of the largest real estate investors and developers.

The Blackstone loan is tied to properties across Manhattan’s Chelsea, Upper East Side and other neighborhoods. They include the Grove, a 200-unit luxury residential rental complex at 250 W. 19th St., CoStar data shows. The commercial mortgage-backed securities loan, originated in 2019 with a current interest rate of 6.03%, was transferred to special servicing in January after having been put on a watchlist.

The development comes as a Vornado Realty Trust joint venture recently disclosed a $450 million loan default on a prime Fifth Avenue retail property in New York as Chief Executive Steven Roth said there are very few transactions on Fifth Avenue and Times Square, the two neighborhoods that house properties under the joint venture.

Brookfield did the same on some Los Angeles office towers. Its loan defaults are tied to a pair of office skyscrapers in another sign of distress for the downtown L.A. office market that has weakened since the pandemic’s start.

The U.S. central bank has raised its benchmark interest rate eight times since March to lower inflation, which had hit a 40-year high. That has helped to raise borrowing costs and led some property owners and investors to have loans transferred to special servicing, a sign that repayments are late, or in jeopardy, or the property backing the loan is experiencing a significant deterioration in performance. The special servicer does loan workouts with options such as loan extension, forbearance, modification, foreclosure, deed in lieu of foreclosure, or loan sale.

KeyBank National Association is the special servicer on the Blackstone loans. The special servicing, at the request of Blackstone, comes as the properties have had higher-than-expected capital spending while floating-rate debt drove up the borrowing costs, a person familiar with the situation told CoStar News, adding Blackstone doesn’t believe it’s the best use of its capital at this time to continue to fund cash flow shortfalls at these properties.

Putting the loan into special servicing allows Blackstone to engage with its lenders to “address how best to move forward in today’s environment,” the person told CoStar, adding Blackstone continues to operate these properties “in the normal course” with zero impact on how it manages them.

The 11 properties are “high-quality, primarily free-market-rate properties located in prime neighborhoods throughout Manhattan,” the person said, adding Blackstone remains “strong believers in the prospect for rental housing globally.”

In an emailed statement to CoStar News, a Blackstone spokesperson said the company is focused on “delivering a best-in-class experience for our residents while we work with our lenders on the capital structure,” without giving more details. “Rental housing remains a high conviction theme for us, including in New York City,” the spokesperson said.

An example of Blackstone’s bet on the rental housing market, including in New York, was demonstrated in June when it bought an 899-unit Frank Gehry-designed luxury residential tower for $930 million, CoStar data shows.

Blackstone executives have said a national housing shortage, coupled with higher inflation, have boded well for rent growth in the apartment sector. As interest rates drive up mortgage rates and stall buying activity, that also has translated to higher demand for rentals, studies have shown.

In New York, for instance, slowed home buying as a result of higher rates has helped send Manhattan’s median apartment rent to a record high for the month of January and keep it at the third-highest level overall of any month, according to a recent report by brokerage firm Douglas Elliman compiled by appraisal firm Miller Samuel.

“Given our concerns around rising interest rates and inflation, we concentrated over 80% of our current real estate portfolio in sectors where strong cash flow growth could help offset these headwinds,” including rental housing, logistics and other property types, Blackstone President and Chief Operating Officer Jonathan Gray said in January on the company’s fourth-quarter earnings call.

The properties involved in the CMBS loan that went into special servicing also include 31-37 E. 31st.; 344 E. 63rd St.; 449 E. 83rd St.; 309 W. 30th St.; 434 W. 19th St.; 337 W. 30th St.; 345 W. 30th St.; 425 E. 84th St.; 445 E. 83rd St.; and 162 E. 61st St., according to CoStar data.

Commercial Observer reported earlier on the loan’s status.