Blackstone, the world’s largest commercial property owner, said real estate values are reaching a bottom as inflation has slowed and the Federal Reserve is expected to cut rates this year.
The perspective from the private equity giant gives an optimistic sign for the sector that’s been hurting from sour deal activity and valuation, and denting even Blackstone’s own performance on the heels of the U.S. central bank’s string of rate hikes.
“The last two years the campaign by the central bank has resulted in muted returns,” Stephen Schwarzman, Blackstone's chairman and CEO, said Thursday on an earnings call with Wall Street analysts, adding performance revenue was down because it chose to sell less in "unfavorable" markets.
“We’ll look back at 2023 as a cyclical bottom for our firm,” he said.
Blackstone’s fourth-quarter real estate segment performance, its biggest business and traditionally an outperformer, was once again the worst-performing segment for at least the fourth straight quarter for the firm that reached $1 trillion in assets under management last year.
Blackstone’s riskier opportunistic real estate investment performance declined 3.8% while its more stable income-producing “core plus” investments sank 4.6%. Most other segments, including its lending business, saw positive returns.
“We are heading to a better environment with the inflation and cost of capital environment moderating,” Jonathan Gray, Blackstone's president and chief operating officer, said on the call.
“Real estate values are bottoming. … We would expect deal activity to pick up. … We continue to see robust fundamentals. …. Our real estate will emerge from this cycle even stronger than before,” Gray said.
Caution Remains
To be sure, Gray continued, some short-term headwinds and hiccups remain for sectors such as office. It also takes time for market confidence to return, he said, adding that also gives Blackstone, with about $200 billion in undeployed capital, or dry powder, an advantage.
We “don’t see a huge surge of capital coming in on a dime,” Gray said on the call. He noted that investors take their time to switch gears.
“You tend to get the greatest opportunities because you can see the light at the end of the tunnel. That will take a bit of time on both institutional and individual [investor] side. It will take multiple quarters of performance. We should be looking to take advantage of the lack of confidence in the marketplace. … We can see the pillars of a real estate recovery coming into place. We are ... not waiting for the all clear sign and believe the best investments are made in periods of uncertainty.”
Fourth-Quarter Deals
Blackstone spent $31 billion last quarter, 2.5 times the amount in the third quarter, Gray said. It inked three major transactions in the past two months, including the $3.5 billion deal to take private Toronto-based Tricon Residential; a partnership with Digital Realty to develop $7 billion of data centers; and a joint venture with the Federal Deposit Insurance Corporation to buy a 20% stake in a $17 billion first-mortgage portfolio from the former Signature Bank, he said.
Meanwhile, sectors such as life science and multifamily, which have seen rents slow down as “new supply works its way,” still have positive long-term outlooks, Gray said. For instance, multifamily construction is down about a third, he added.
“Once you work through [the new supply,] we should be in a much better place. … [It’s] an overall constructive housing environment [with the housing shortage.]”
As banks have cut back on lending to limit their exposure to real estate, Blackstone, whose credit business reported positive returns once again in the fourth quarter, still maintains that “it’s a good time to be a [commercial real estate] mortgage lender,” Gray said.
End to Limit on Redemption Requests
In another indication of a brighter road ahead, Blackstone Real Estate Income Trust, which posted its worst annual performance in 2023, may see its shareholder redemption cap lifted this quarter, Gray said. Blackstone REIT, which has had to limit redemptions over the past year, has seen those requests slow significantly with December requests 80% lower than the January 2023 peak.
While Blackstone’s fourth-quarter net income dropped to $151.8 million, from $557.9 million a year earlier, brought down by lower performance revenue, its distributable earnings, or profit available to shareholders and a key performance metric, rose to $1.39 billion from $1.33 billion. The fourth-quarter distributable earnings were the highest in six quarters, “which capped a volatile year for global markets,” Schwarzman said.
“Our funds appreciated overall in 2023, highlighted by strength in credit, infrastructure, corporate private equity, and life sciences, even as we weathered the difficult environment for real estate,” he said.
Economic ‘Soft Landing’
Investor sentiment on the company also looked to be improving, with its fourth-quarter inflows of $52.7 billion more than double those in the third quarter and also the best in six quarters. Total inflows for 2023 reached nearly $150 billion, the third best in the company history, despite “the challenging fundraising environment,” Chief Financial Officer Michael Chae said on the call.
Total assets under management rose to $1.04 trillion after crossing the $1 trillion mark in the second quarter.
“The U.S. economy has remained quite strong,” Schwarzman said. “Unemployment is nearly unchanged since the start of the Fed's tightening cycle. Most consumer segments are healthy, corporate balance sheets are strong, and credit fundamentalists remain solid. ... We see a resilient economy, albeit one that is decelerating. What we're seeing is consistent with a soft landing.”
Wage and other cost pressures also have eased as businesses Blackstone invests in are seeing “strong” revenue performance as well as higher profit, Schwarzman said.
A case in point of wage pressure slowing for employers, for the first time in two and a half years, the majority of Blackstone’s surveyed companies aren’t finding it “challenging to hire workers,” Gray said.