Blackstone’s Gray: ‘It’s a very favorable time to be a lender’

Blackstone's president and chief operating officer considers real estate debt to be ‘an area of growth' for the firm.

There is no shortage of alternative lenders that see increasing opportunity as more banks retreat from the real estate financing market. New York-based Blackstone, with its own large-scale real estate debt platform, is no different.

“I think our real estate debt business is in a really great spot today,” Jon Gray, president and chief operating officer, told investors on the firm’s Q1 2023 earnings call. “Banks are quite focused on commercial real estate exposure, shareholders, regulators, and that is leading to a pullback. So if you have fresh capital to deploy in that area, I think it’s quite positive.” Real estate debt opportunities include new originations through the firm’s Blackstone Real Estate Debt Strategies business, or through real estate debt securities.

Real estate investment on the equity side will take time to return given the need for confidence and stability in the markets. “So I think the opportunity in real estate debt will come first,” Gray said. “And I think it’s a very favorable time to be a lender in that space. Obviously, the office sector in the US is the one cautionary area where there’s more exposure, although debt loan to value levels were much lower than they were in the last downturn.”

Overall, Blackstone is seeing the greatest demand today for private credit products and services, given higher interest rates and wider spreads, he added: “Coupled with the pullback in regional bank activity, this is a golden moment for our credit, real estate credit and insurance solutions teams, which accounted for 60 percent of the firm’s inflows in Q1.”

The firm is in position to take advantage of the real estate debt opportunity through three distinct pools of capital. Blackstone has long established separately managed account relationships with various insurance companies that will provide capital.

Blackstone is also in the market with its latest Blackstone Real Estate Debt Strategies fund, BREDS V. The firm has raised $3.5 billion for the fund so far, Gray said. Blackstone raised $8 billion for its predecessor fund in 2020.

Finally, Blackstone is seeing increased investor demand for its debt-focused non-listed REIT, Blackstone Private Credit Fund (BCRED). Similar to the equity-focused Blackstone Real Estate Income Trust, BCRED is also targeted at retail investors but is seeing greater flows as investors “are more open to the debt business, Gray said: “Right now, we’re seeing investors cautious really towards all equity vehicles.” The firm saw nearly $500 million of commitments for BCRED last month, the highest amount since October, he added.

Gray pointed out that as a floating rate lender, BCRED has benefited from rising interest rates: “Its returns this year have been extremely strong because defaults remain low and base rates have moved up quite a bit. We’re now also seeing spreads gap out on new originations, which helps.”

He added that in addition to its real estate equity business, Blackstone also has a very large real estate debt business, which alone has $60 billion in assets. “In most firms, that would be quite sizable but inside our nearly trillion-dollar business, it doesn’t get a lot of attention,” Gray said. “It’s an area of growth for us.”