Blackstone talks ‘fresh approach’ to office investments

As it prepares to fully divest its original Equity Office Properties investment, the firm is seeking to modernize its office platform, led by a new CEO.

Blackstone is preparing to sell the last properties from its original Equity Office Properties Trust portfolio that the New York-based private equity and real estate firm purchased in a landmark take-private a decade ago.

The company is reportedly expected to triple its $3.8 billion equity investment on the remaining assets, which include San Francisco’s Ferry Building, a Santa Monica, California office park and Boston’s 100 Summer Street, a 32-story tower. Those assets are slated for sale by year-end.

As EOP looks to its next chapter, the platform is also under new leadership, with chief operating officer Lisa Picard promoted to chief executive in May. She joined the firm in November 2016 after almost six years at real estate developer Skanska, where she was a vice president.

In November 2006, Blackstone agreed to acquire EOP for approximately $36 billion, and then struck deals to sell $27 billion worth of properties from the former office-focused real estate investment trust in its first three months of ownership, shedding assets in non-core markets such as suburban Chicago.

“It was unbelievable – the pace, the scale, the capital – everything was supersized,” Jon Gray, Blackstone’s head of real estate, told PERE. “A lot of people say it was lucky we sold a lot off. We sold a lot off, but that was the game plan. Our good fortune was we executed that very quickly.”

Blackstone funded the original purchase with capital from its fifth and sixth opportunistic real estate funds. Blackstone Real Estate Partners V, a $5.5 billion, 2005-vintage fund, generated an 11 percent net internal rate of return as of March 31, while BREP VI, an $11.1 billion, 2007-vintage vehicle, had a 13 percent IRR as of the same date, according to the firm’s first-quarter earnings.

After the global financial crisis, Blackstone largely waited until 2013, when pricing recovered, to start selling EOP’s original portfolio. The firm has also added to EOP’s platform with purchases including Chicago’s iconic Willis Tower, which was acquired in June 2016 for $1.3 billion and will be undergoing $500 million worth of renovations, PERE previously reported.

The Willis Tower is emblematic of EOP’s approach to offices going forward, Gray said. The platform now has 50 million square feet of office properties, 90 percent acquired after the original EOP purchase, with plans to pursue creative office transformations under Picard’s leadership as CEO.

“Lisa has a fresh approach to how we operate buildings,” Frank Cohen, the firm’s head of core-plus real estate platform, said. “What’s changing now is how important it is to make buildings more modern and more open, different from the way space was used a decade ago.”

Blackstone managed $102.1 billion in real estate assets at the end of the first quarter.