There’s also one select Service Hotel which I think would — I didn’t talk as much about hotels this quarter, but we have seen continued strength on the hotel side, especially in the sectors that we are focused on. You know, I think that like everything we will see some deceleration over time, but select service in good markets, resorts in good markets, those assets are performing as well. And so one of our upgrades was the select service hotel as well.
Steve DeLaney: Got it. So on the multifamily really just strong leasing, solid year-over-year rent increases, and basically just achieving at plan or even better than plan expectation. So leads you to think that at the basis you’re in, the owner will probably comfortably be able to refinance, is that the right way to think about that, and that loan is probably going to be off your books in a year or so?
Katie Keenan: Yeah, it’s a good question. I would say our 2s and 1s are easily refinanceable in this market. I think the question for our borrowers and what we’ve seen over the course of the last year it’s really comes down to their business plan. So if they’ve reached the end of their business plan, and their next capital markets activity is selling, it’s likely that they’re just going to keep our loan in place for longer. It’s unusual for someone to go out and refi if they think they’re going to sell in a year or 18 months, the costs just don’t really make sense. So we have a lot of borrowers that are sort of just waiting for a window in terms of sale. And in the meantime, we have these very high quality, stabilized assets sticking around in our portfolio, because people aren’t going to try if they have a good quality deal, they’ve done a good job on, they’re not going to sell into a more challenging market, they’ll just wait.
These assets have decent cash on cash, the spreads on the loans in the portfolio generally are probably lower than where they could achieve elsewhere in the market. But, the capital structures are set up the right way, because they’ve created value. And so I think these loans will stick around for longer. And that’s certainly what we’ve seen so far.
Steve DeLaney: Thanks for the color, Katie.
Operator: We’ll go next to Sarah Barcomb with BTIG.
Sarah Barcomb: Hey, everyone, thanks for taking the question. So I would just like to talk about office color, generally. So from where we sit post Labor Day 2023 do you think the weakness in office fundamentals and recent instability are more entrenched in work from home policy or overall economic weakness at this point? And if the latter worsens next year, as more pre COVID office leases expire at the same time, should we expect to see additional reserves taken on that asset class and at what point do you think we would start to see REO come on to the books or would we see more modifications like we saw this quarter, can you talk about that balance as we head further into next year?
Katie Keenan: Sure, that’s a lot of questions, I’ll try and hit all of them. And let me know if I miss anything. I think as far as the broader outlook on office, it’s pretty interesting, because there are two sort of counterbalancing effects, there’s certainly the risk of a cyclical downturn, although, the economy has been remarkably resilient to date. And if you look at the main users for the types of office buildings that we make loans on, whether it’s the fire tenants, sort of creative marketing, content creation, even the tech industry, which is obviously pulling back from office a lot right now. But the business itself, actually, in recent earnings looks to be doing pretty well, those industries seem to be pretty resilient in the face of the overall macro.
And, we’ve seen job growth there as well, which historically has been an indicator, a leading indicator of demand growth. Now, of course, there’s also the countervailing factor of return to office, which has marched along sort of slow and steady positively. But of course, it’s still below pre COVID levels, and overall sort of space rationalization. I would say, when we look at the statistics, and there have been a number of third party market reports out there this quarter, you can see that tenants are making space decision, return to office continues. There’s a lot of tenants out there that have instituted new return to office policies this quarter, starting next year, sort of every quarter, there’s more of that. But I think that there’s certainly still a question as to where that ultimately settles out.
For our portfolio, I think the big question is the concentration of demand in which office buildings and how does that overlay with what we have, and 60% of our 1 to 3 rated office is sort of post 2015 vintage, which is much higher than the market as a whole. And one of the statistics I saw recently, which I thought was really interesting was that 90% of office vacancy is in like 30% of office buildings. And so when you think about that, relative to the concentration of where demand is going, and there’s lots of statistics like that in terms of net demand, etc., we just have to make sure that our office buildings are well positioned in the market to capture a disproportionate share of demand. Because there’s going to be these sort of broader market dynamics in terms of demand.
And I think it’s candidly very hard to predict where those level out. I think as far as more reserves and mods and as we look forward to next year, every single one of our assets is a facts and circumstances like bottoms up deal decision. So when we approach each loan and each conversation with a borrower, whether it’s proactive, a year ahead of time trying to get capital in the door, whether it’s looking at making sure the asset is appropriately capitalized to capture those leases in the market, which is something we’re very focused on, or whether it’s thinking that we may be in a better position to maximize value for the asset in an REO situation that our borrower for various reasons. We’re really looking at each one of those and just using all the tools we have, whether it’s our expertise, our capital, the strength of our balance sheet to just make sure that we’re maximizing value over time.
So, do I think that we could potentially have some assets come on to REO or some more of those conversations over time, of course, and that’s market. That’s definitely are very likely to happen. But I think that, we have the tools and we’ve really been ahead of the game in terms of reducing our bases in these deals and making sure that they’re appropriately capitalized. And also coming up with our contingency plans, our business plans, putting the right team in place to make sure that if we end up in those situations, we’ll be ready to hit the ground running and maximize our potential recovery.
Sarah Barcomb: Okay, great. Thanks for all the detail there. And then just one more from me, you mentioned during Q&A that you guys are actively looking at new investments, given how strong liquidity is. So I was just curious if you could give a bit more color on what’s looking interesting right now, whether credit or equity, I know we’re focused on BXMT right now, but maybe some perspective from the broader Blackstone platform, just maybe some detail on what looks interesting from a sector or a geography perspective? Thanks.
Katie Keenan: Yeah, absolutely. I think it is a really interesting time to invest and as a whole, at Blackstone, we are really focused on the credit opportunity. We think it is a tremendously interesting time to be a credit investor, you’re inherently investing at a discount to asset value that creates a defensive position, and the returns available, you can see it in our results, and really, across the Board in credit, especially floating rate credit, are just historically attractive, in terms of the risk return you can achieve. So we think credit is really interesting. That’s certainly a posture of our business and across the firm. And I think on the real estate side, as far as sectors we’re excited about, the demand growth in data centers has been phenomenal.
That’s an area we’ve been very active on the equity side as well as on the debt side. Student housing continues to be very strong, certain lodging and leisure sectors. And obviously, on the credit side, multifamily continues to be a good area at the right basis and we’ll be focused there too. And actually industrial obviously, continues to be a good sector.
Sarah Barcomb: Great.
Operator: We’ll go next to Jade Rahmani with KBW.
