With each of The Blackstone Group’s recent real estate platforms, there was a mammoth deal that started it all. For its retail business, for example, it was the $9.4 billion purchase of Centro Property Group’s US retail portfolio. Its office platform, meanwhile, was launched with the 2007 takeover of Equity Office Properties Trust for $23 billion, one of the largest leveraged buyouts in history.
Now, the New York-based private equity and real estate firm is launching its latest property platform in multifamily on the back of its purchase of majority stakes in about 70 apartment buildings from GE Capital for approximately $2.4 billion. With the transaction, Blackstone gains some 26,000 apartment units in Texas and the Southeast, as well as more than 15 operating partners that will retain minority stakes in the properties.
“We knew that, if we could take this deal and turn it into a platform, it would create a lot of investment opportunities for us,” said Frank Cohen, one of the Blackstone partners who oversee the firm’s North American acquisitions. Although the new business has yet to be named, the firm expects to assemble a core team during the fall and bring on additional hires over the course of the next 12 months.
For starters, Blackstone will inherit new joint venture partners, which will help it to identify new transactions in the sector. Additionally, the firm will gain a competitive advantage through the market data it will derive from monthly reports detailing the traffic, occupancy and rents at the properties in the portfolio. “We now have the best source of information on how the multifamily asset class is performing,” added managing director Nadeem Meghji, who leads apartment investments for Blackstone.
Blackstone had been investing in the multifamily sector since the 1990s, but launching a platform involved “having the right opportunity to capitalize on,” said Meghji. Indeed, prior to buying the GE Capital portfolio, the bulk of the firm’s existing apartment holdings consisted of 3,000 units in Pennsylvania, North Carolina and Ohio purchased last fall from Nationwide Realty Investors through a joint venture with Rochester, New York-based Morgan Properties.
Despite the nascent housing recovery and pickup in apartment construction in recent months, Blackstone is betting on multifamily fundamentals to remain robust amid cutbacks in mortgage lending from Fannie Mae and Freddie Mac; new supply running at less than 50 percent of historical averages; and household formation also off significantly from the peak of the market in 2005 and 2006. “This has resulted in pent-up demand that we think is going to result in a driver for rent and net operating income growth for the next couple of years,” said Meghji.
As with its other property deals, Blackstone anticipates upside in the portfolio to also come from fixing up the assets. “We definitely believe there will be opportunities within the portfolio to strategically invest capital and make upgrades to get above-market rates of growth,” noted Cohen.
While multifamily currently is the smallest of the major property types in which Blackstone invests, Meghji said the firm expects that to change over the next few years, especially with the firepower of a $13.3 billion opportunity fund to help fuel its expansion. “As long as we see positive fundamentals, we’re going to be focused on the sector,” he added. “It’s certainly a priority for us right now.”