Blackstone’s Gray: “hyper-risk aversion may well go away”

Real estate values may see recovery in the months ahead, provided sovereign wealth funds and public and private real estate firms get over their aversion to risk, according to The Blackstone Group’s global head of real estate. 

In a keynote speech at the PREA/IPD US Property Fund Index launch, Jon Gray told attendees: “In the low interest rate environment we’re in, some of this hyper-risk aversion may well go away.” He added that the industry “may start to see real estate investors widen the lens a little bit in terms of what they’re comfortable owning.”

Gray pointed out some examples where the public and private markets can help the real estate market see a recovery in values. One area he cited was sovereign wealth funds. With enormous pools of capital, large state funds are looking at a world in which they can buy a hard asset “and get a 5 percent or 6 percent yield, a chance at capital appreciation and a hedge against inflation, if and when inflation comes along.” As a result, these large pools of capital from sovereign wealth funds “are going to start buying more hard assets, which will be quite supportive of asset values.” 

Gray said he believes that, initially, many sovereign wealth funds will just buy in the major markets. Eventually, however, they should get braver and venture out to the secondary markets. 

Another important factor that may support real estate values in the months and years ahead is the increased involvement of public companies in the space. With US banks not wanting to make as many commercial real estate loans these days, but bond holders looking for yield and happy to hold real estate debt, “public companies can deliver real estate debt to bond holders without having somebody take balance sheet risk,” Gray said. He added that he thinks a similar thing will happen in Europe, since the European banks are in an even tougher spot than US banks.

An area that will benefit from this decreased fear of risk will be the secondary property types and markets. Although Blackstone has been an active buyer in suburban office buildings, strip shopping centers, warehouses and limited service hotels, the rest of the industry generally has not been a fan of such assets. 

Although the world has not yet come to this real estate, Gray said he thinks the industry will see an increased interest in these assets as fundamentals continue to improve. “In a place like suburban Atlanta, office vacancies have steadily declined 100 to 200 basis points, and now those debt markets are starting to get a little better,” he said. “I think you’ll see values of some of the stuff that’s been out of favor begin to rise.”