While many of the headlines around commercial real estate have focused on the US office sector, Blackstone’s largest business has zeroed in on an entirely different region and property type for investing.
“Today, the area we’re most active in is actually European real estate, particularly in logistics, because the sentiment around European real estate is so negative,” said Jon Gray, Blackstone’s president and chief operating officer, on the mega manager’s second-quarter earnings call Thursday. “And yet if you look at, for instance, rental growth in UK logistics, it’s incredibly strong.”
Blackstone also achieved fundraising success in Europe during the second quarter, reaching an “accelerated” first close of $1.3 billion for its seventh European opportunistic real estate fund, Blackstone Real Estate Partners Europe VII. The firm announced during the first quarter earnings call that it had started fundraising for its flagship European real estate fund.
For BREP Europe VII, Blackstone is eyeing a similar fundraising target to its predecessor vehicle, which closed on €9.8 billion in 2020. Among the LPs in BREP Europe VII are the Arkansas Teacher Retirement System, with a $50 million commitment, as well as the New Mexico State Investment Council and Teacher Retirement System of Texas, both of which earmarked $150 million, according to PERE data.
However, Gray acknowledged “real underlying fundamental headwinds” facing certain sectors, particularly office in the US. “I still think we have ways to go in terms of what will be continued challenges going forward. And there will be more foreclosures and more markdowns coming in portfolios,” he said.
“I think we’re in a moment where everybody is extrapolating what’s happening in office buildings, becoming incredibly negative about the sector. But that’s going to create some real opportunities,” Gray added. “There will be need for people to sell and inject capital because of the higher debt costs that are out there.”
He pointed out how commercial real estate continues to be significantly bifurcated, with some sectors such as US office facing challenges and others like logistics, student housing and data centers benefiting from strong underlying fundamentals. In logistics, for example, supply is decreasing, with a 40-50 percent decline in new starts, Gray noted.
Such sectors will also yield opportunities in the future once interest rates start leveling off. “At some point, 12 to 24 months from now, the Fed will start to take the short end down… so, if we are at a point in the cycle where the risk of rates going much higher is off the table, that’s helpful to real estate,” Gray said.
US offices represent less than 2 percent of Blackstone’s portfolio. On the other hand, half of the firm’s owned real estate is in logistics, student housing and data centers, which have experienced “double-digit year-over-year growth in market rents,” according to Michael Chae, the firm’s chief financial officer. The firm owns $175 billion-worth of warehouses – its largest real estate sector exposure.
Blackstone reported real estate assets under management of $333.2 billion in Q2 2023, taking its total private markets AUM to a record $1 trillion. Real estate represents the firm’s largest business, followed by private equity with $295.3 billion of AUM.
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