With inflation, higher interest rates and other variables on the minds of investors, Blackstone Group, billed as the world’s largest alternative asset manager and biggest commercial property owner, still sees real estate investments as important to helping it weather market uncertainties.
Its first-quarter results explain why. The gross returns of its opportunistic real estate investment portfolio appreciated 10.3%, while those of its core real estate portfolio rose 7.9%, with both driven by bets on global logistics, residential and life sciences properties. Those scorecards outperformed the 2.8% gain in value of its private equity segment; an 1.2% increase in its hedge funds segment; and a 1.7% increase in its private credit portfolio.
The performance of Blackstone’s real estate also helped push its distributable earnings up 63% to $1.9 billion in the first quarter even as its total revenue and profit declined. Total assets under management rose 41% to $915.5 billion, driven in part by the 52% increase to $298.2 billion in the real estate segment.
While no investment firm is immune to the impact of rising interest rates and higher inflation, Blackstone is fending off market-driven wildcards by investing in areas including “hard assets” that are traditionally safe in an inflationary environment, Jonathan Gray, Blackstone’s president and chief operating officer, said Thursday during a conference call with analysts.
“We’ve been mindful of the prospect of rising interest rates” for several years, he said.
While Blackstone first invested in the logistics sector in 2010 to capitalize on the expected growth in e-commerce, Gray said its current focus on logistics also can help mitigate supply chain-related concerns and disruptions. Blackstone owns $170 billion worth of warehouses worldwide, he said, adding logistics represents 40% of its global real estate portfolio, its largest real estate investment.
“In an inflationary and rising rate environment, the importance of owning things where cash flow can grow is super important,” Gray said on the call, adding real estate sectors with “good fundamentals and short-duration leases” have “pricing power.”
A case in point of Blackstone’s investment strategy, the New York-based firm this week agreed to buy American Campus Communities, the largest developer, owner and manager of student housing complexes in the United States for $12.8 billion in cash. The return of most college students to in-person learning this past fall has given a boost to student housing and driven investor interest, especially as rental prices in cities such as New York have surged to record highs.
In a positive sign for the global travel industry hard hit by coronavirus-driven restrictions, Gray also said Blackstone is seeing a “robust recovery in global travel.” Blackstone, for instance, last quarter agreed to buy Crown Resorts, one of Australia’s biggest casino operators.
While office properties didn’t come up on the call, Blackstone isn’t totally counting out on the hard-hit sector. The firm last quarter bought the partial ownership of New York’s One Manhattan West, located at 401 Ninth Ave., that valued the 67-story, 2.1 million-square-foot office tower at $2.85 billion.
With the growth in business, Blackstone also has been expanding its own real estate footprint as a tenant in cities such as New York. For example, it recently signed an additional 200,000 square feet at 601 Lexington Ave. on the east side of midtown Manhattan after it last year also expanded its headquarters footprint at 345 Park Ave.
“Institutional investors have increasingly been focused on warehousing due to its shorter term leases, allowing a strong hedge against inflation risk,” said Adam H. Klein, Senior Advisor with SVN | Commercial Partners. “Many savvy investors were ahead of this curve and we continue to see landlords of sub-100,000 square foot properties renewing leases with clauses to offset or pass through the rising cost of insurance, property taxes, materials, and management onto tenants. This trend has become more critical in recent economic times.”