Economic conditions in the first half of 2022 were rough. Amid continued high inflation, rising interest rates, and a slowing economy, the S&P fell 20 percent. Activity in capital markets slowed, and stock portfolios posted some of their worst returns since the Great Depression. Many economists have predicted a recession is imminent, and the real estate industry and investors are bracing for the worst. Despite this, Blackstone, the alternative investment management giant that has morphed into the largest private investor in the world since its founding more than 35 years ago, has been barreling forward, posting record-high numbers.
In the second quarter of this year, the New York-based company’s distributable earnings nearly doubled year-over-year to $2 billion, one of the best quarters in Blackstone’s history, according to the company’s latest earnings call. Blackstone Chairman, CEO & Co-Founder Steve Schwarzman attributed the company’s success in such a tumultuous time to the strength of the company’s name and reputation. “We believe it is the power of our brand and our superior performance, which have enabled us to build unique relationships with our clients over decades,” Schwarzman said during the call last month.
The idea of brand power is something Blackstone has been heavily focused on lately. Earlier this year, Blackstone hired ad executive Jonny Bauer as its new head of brand strategy and transformation. Bauer was the founder of Droga5, one of the world’s most powerful ad agencies, before he made the move to the private equity world, a decision AdAge called “a head-scratching moment.” Bauer’s new role will entail him building brand equity for Blackstone’s portfolio companies, as well as participating in due diligence of target acquisitions. “There are things that make for great investments, and then there are things that make for great brands. And we try to connect those,” he said.
Social media is also part of the brand equation for the firm. A 2021 report from Peregrine Communications praised Blackstone as demonstrating best practices in social media in a case study that is part of its “The Alts 50” report on the world’s leading alternative investment managers. Putting executives closer to the public with videos like “Mondays at Blackstone,” showing their support for D&I initiatives, and describing themselves as “mission-driven” investors has also helped the company’s portrayal to the public as more future-thinking and in line with the changing priorities of investors.
Building a brand
Schwarzman and the late Peter Peterson launched Blackstone in 1985 with $400,000 in seed money with the intention to create a boutique advisory firm focused on mergers & acquisitions. Just a few years later, the firm reached a major milestone when it advised CBS Corp. on the sale of its subsidiary CBS Records to Sony. Now, nearly four decades later, the small shop has grown into an industry behemoth, with $941 billion in managed assets, as of the second quarter of 2022. Blackstone’s four main departments it operates through are private equity, real estate, hedge fund, and credit and insurance. Within its real estate arm, which has $320 billion in managed assets as of June 2022, the firm has three areas of investment: core plus, global opportunistic, and debt.
The company’s major real estate holdings include a majority stake in Stuytown, the massive, 56-building residential complex in Manhattan that the firm paid $5.3 billion for in 2015, along with a group of investors including Ivanhoe Cambridge. In the industrial sector, the company made a big bet in Europe earlier this year when it purchased a logistics portfolio spanning Germany, France, the UK, and Spain worth $24 billion. In 2016, Blackstone made a splash in the hot life sciences market with the acquisition of BioMed, a life science office REIT.
Blackstone’s most recent acquisitions included taking American Campus Communities, the largest developer, owner, and manager of student housing properties, private in a $13 billion deal. Blackstone is looking closely at the “compelling” sector, as enrollment in top-tier universities has continued to grow in the US. Last year, the number of applications to the country’s most selective four-year colleges increased a record-breaking 17 percent. The company also made another major deal when it acquired PS Business Parks, a logistics REIT, for $7.6 billion in July. It was another transaction that involved Blackstone taking the company private.
Another real estate component of Blackstone is Blackstone Real Estate Income Trust (BREIT), which the company launched in 2017 as a platform for individual investors. As of March 2022, BREIT has a $94 billion portfolio of properties that are 95 percent occupied. The portfolio, primarily industrial and residential, is mostly located in cities in the South and West with high population growth. The trust’s two milestone acquisitions since its launch were its $10 billion acquisition of QTS Data Centers and its $6 billion acquisition of Home Partners of America, one of the largest owners and operators of single-family home rentals. According to BREIT, since its launch 5 years ago, it has consistently posted strong numbers, including a 12.4 percent annualized net return.
With $170 billion of dry powder waiting on the sidelines, the company is ready to jump on opportunities that are expected to arise soon. The company told me that 80 percent of its portfolio is in four sectors: logistics, rental housing, life science office, and hotels. And that’s where it continues to see “extraordinary” growth that is not being disrupted by inflation. These sectors are where Blackstone expects to keep investing in, but the company didn’t rule out looking at other areas with strong growth, like data centers and self-storage. “Regardless of the environment, our approach remains the same,” Blackstone said. “We focus on investing thematically in places where we see growth, what we call good neighborhoods.”
That entails investing in sectors where it sees growth outpacing inflation and where rents are growing 2 to 4 times the current levels of inflation. In late July, Blackstone said in a regulatory filing that it had raised $24.1 billion over the past three months for its latest opportunistic real estate fund, known as Blackstone Real Estate Partners X. The firm is eyeing to raise a total of $30 billion once it closes, making it one of the largest real estate investment funds in history.
In late August, the BREIT-owned firm Home Partners of America, a single-family landlord with more than 17,000 homes in over 80 markets, said it was pausing buying homes in 38 markets around the country. The news made headlines as Blackstone became the latest institutional investor to pull back from the housing market, which has finally started to level off after getting overheated. Fellow SFR firms Invitation Homes and American Homes 4 Rent said in second-quarter earnings calls that they would likely make fewer acquisitions in light of higher interest rates. Blackstone downplayed the move in a statement at the time, saying the pause is in markets that “represent less than 5 percent of our recent activity” and that it and Home Partners would continue to make acquisitions in more than 20 markets in the U.S., the company said.
We can expect to see Blackstone continue to invest in the life science sector, an area the company said it is “big believers” in, especially its investment in BioMed. The company is also increasingly bullish on the hospitality sector, which has been getting back on track and was expected to post record summer demand numbers. “Much of our focus in this space has been on irreplaceable assets,” Blackstone said.
Like many other investors, Blackstone has a focus on Sunbelt markets where housing costs are lower, and there is continued population and job growth. The company is avoiding bond-like assets or businesses with lower margins and heavy exposure to labor and other input costs, Blackstone said. “While nobody really predicted that we would see 9 percent CPI, we had been preparing our portfolio for several years for a higher interest rate environment,” the company said. Office assets represent only 4 percent of Blackstone’s global portfolio, and it is keeping a close eye on market trends like the flight to quality. The company said they believe there will be good opportunities in the office market but will be cautious about choosing assets in the right location.
Like other non-traded real estate investment trusts, the firm could feel some impact from tighter regulations proposed by the North American Securities Administrators Association (NASAA), a nonprofit group of securities regulators that seeks to impose restrictions on how much money one person can invest in non-traded REITs. Despite that threat and the current economic recession, Blackstone executives remain optimistic. “I don’t think there’s reason to be particularly concerned about the long term because, in the long term, we also have an amazing group of people at the front. Truly astonishing group of people and that’s how you build a business,” said Blackstone Chairman & CEO Schwarzman in the second quarter earnings call.
Like many of the world’s biggest companies, but unlike most real estate organizations, Blackstone views its brand as an integral part of its business, on par with employee talent, ESG leadership, and data science. Where some companies might bring in the branding team post-facto to justify business decisions, Blackstone is now using its brand strategy to inform decision-making at the C-suite level and as a mandate for everyone within the organization. That clarity of vision should ultimately help the company recruit talent, build products and set itself apart as a purpose-driven real estate investor.