Blackstone's Investment Strategy for $30B War Chest

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Good morning. Blackstone shares how and when they plan to spend $30B in a volatile market. Meanwhile, assumptions for underwriting are becoming more stable for prime multifamily assets.

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Blackstone's Investment Strategy for $30B Fund

The largest alternative asset manager in the world, Blackstone, has recently raised the biggest real estate fund in history. However, with the current market being the most unpredictable in a generation, the key question is when and how the company will deploy its $30 billion war chest.

Shift in strategy: According to Kathleen McCarthy, Blackstone Global's co-Head of Real Estate, Blackstone’s business has changed significantly, moving away from traditional US office assets to focus on sectors such as industrial, rental housing, data centers, life sciences, and hotels. Over the past 12 years, these sectors have grown from 3% of their portfolio to more than 80%. This shift has enabled the company to succeed in a volatile environment and provided valuable data to capitalize on its strongest sectors.

Patience is a virtue: Blackstone has held onto most of the $30 billion it raised last year and only spent a small portion of it by the end of 2022. They, like others in the market, have been waiting for the gap between seller and buyer valuations to narrow, which Kathleen McCarthy believes is now happening as owners need capital to complete their plans and refinance assets. Borrowers will have to sell at lower prices for buyers to make good returns, but there won't be large-scale sales like those caused by banks in the past.

Unwavering convictions: Blackstone's purchase of a Toronto logistics property portfolio and a Swedish property portfolio from sellers needing liquidity exemplify how transactions will increase with more financial market stability, according to Kathleen McCarthy. She stated that both assets were purchased at a 30% discount to replacement costs. The company's focus on industrial, rental housing, data centers, hotels, medical offices, and life sciences has remained unwavering, with 80% of its real estate portfolio in those sectors, McCarthy noted. These sectors offer strong rental growth, hedge against inflation, and have macroeconomic factors that support their expansion.

Office outlook: McCarthy informed Bisnow that in addition to revealing where the new fund will invest, Blackstone is also cautious about where it will not invest, specifically traditional offices. The company has reduced its office exposure over the years, with only 2% of its portfolio currently in offices, compared to 61% in 2007. McCarthy said they began this shift before the pandemic and do not anticipate increasing office exposure in the near future.

➥ THE TAKEAWAY

The price is right: The new fund’s size allows Blackstone to use more equity when debt is harder to come by while also giving them the flexibility to move quickly into different deal types when smaller investors might not be able to. Their war chest also allows them to wait patiently for the right price and opportunity. Overall, Blackstone believes in investing at a time when others are pulling back because that’s “where the best performance comes.”

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Are Slowing Cap Rates Sign of Brighter Multifamily Future?

If CBRE’s recent cap rate data report is any indication, we may see signs of hope for CRE in 2023. The report showed that cap rates for Class A multifamily properties have slowed down for the first time since the Federal Reserve began raising interest rates in March last year.

By the numbers: Rewritten: The multifamily going-in cap rate saw a 23 basis point increase to 4.72% in Q1 2023, the first significant deceleration in cap rate expansion since the Fed started its recent rate hikes. CBRE also reported that IRR and rent growth targets slowed down in Q1, indicating further stabilization.

By the markets: Austin had the lowest underwriting risk requirements among 15 major multifamily markets for six consecutive quarters, according to CBRE. Although no market showed improvements in multifamily metrics, Boston and Seattle had less changes and improved on the risk spectrum. In Q1 2023, five markets had no additional going-in cap rate expansion and 10 had no additional exit cap rate expansion, indicating broader stability in multifamily underwriting assumptions. Two markets had no movement in exit cap rates during Q4 2022.

➥ THE TAKEAWAY

Rose-tinted glasses: Multifamily investors are exercising caution despite the stability of market fundamentals in various regions. The market is projected to improve once interest rates stabilize, resulting in more activity from buyers, sellers, and lenders. However, Christopher Thornberg, a founding partner of Beacon Economics, advises investors to view the data “with a giant grain of salt” due to ongoing inflation and an asset price bubble resulting from the Fed's generous monetary policy over the last three years. Thornberg also cautions that property values remain high and are not decreasing.

📖 Read about billionaire investor and Oaktree Capital’s co-founder, Howard Marks, who sounds the alarm on CRE as “one of the biggest worries” U.S. banks face today.

🖥️ Watch as Michael Belasco from Adventures in CRE walks through the A.CRE RV Park Acquisiton Model.

🎧 Listen to this episode of Bisnow Reports, where JLL’s Bob Knakal and Walker & Dunlop’s Aaron Appel discuss CRE’s rollercoaster start to the year and the battle between fear and greed in the market.

• Lifestyles of the rich and famous: The ultrarich own second (or third) homes in cities like Miami, Naples, the Hamptons, and Aspen but only visit occasionally.

• Snubbing office: Life insurance companies are the next to turn their back on the office sector as rents continue to fall while vacancy rates rise.

• Dishing with Dishy: David Dishy talks about becoming the CEO of LMXD, a new arm of L+M Development Partners which plans to build upon his NY affordable housing experience.

• Finder’s fee feud: Tech entrepreneur Adam Cooper is suing his best friend Maurice Kaufman and his CEO father over violating an agreement entitling him to a $1M finder’s fee. Oh boy.

• Texas-sized tax break: Tax incentives similar to Chapter 313, which brought billions in business investments to TX but expired last year, are being contemplated in the Texas State House.

• Miami living: Despite a slight slowdown in Q1, Miami is still one of the hottest housing markets in the nation. People continue to be drawn to its warmer weather and easy tax benefits.

• Blacklisted: Fannie (FNMA) and Freddie (FMCC) have a secret and growing list of condos, associations, and co-ops that they won't lend to—and sellers often find out the hard way.

• Looking for alternatives: Multifamily buyers are getting creative with alternative financing strategies in order to get transactions done.

• Another day, another default: Brookfield (BN) has defaulted on a $161.4M loan tied to a dozen office buildings, largely in the DC area.

• Wellington revamp: Extell Development plans to renovate the Wellington, a 27-story, century-old hotel near Midtown’s Billionaire’s Row.

• Get back to work: In response to the Real Estate Roundtable, the Biden Administration is calling for all federal workers to get back into their offices.

• Chasing returns: Schwab (SCHW), State Street (STT), and M&T (MTB) saw almost $60B of withdrawals in Q1 as customers rushed to seek higher returns elsewhere.

• Not-so-hot: According to CoStar, U.S. hotel investment sales dropped to $7B in Q1, a 55% decline from the $15.49B of transactions in Q4 2022 and a 20.8% YoY decline.

Annual rent growth assumptions for prime multifamily deals in the first three years have decreased over the past two quarters, with gateway markets having higher average rent growth expectations. Despite the pandemic's impact on gateway markets, some like Boston and New York have recovered well due to returning residents.

The long-run average for rent growth assumptions is around 3%, slightly higher than the current 2.9% expected in Q1 2023. As markets stabilize, rent growth assumptions will likely decrease but eventually settle near the long-run average.