When the asset management group Blackstone was founded in 1985, Peter G. Peterson and Stephen A. Schwarzman originally formed a mergers and acquisitions advisory boutique. Schwarzman approached Peterson, his former boss at Lehman Brothers, about starting an investment firm, and he wanted to make private equity investing the heart of the business model. Over the past three decades, Blackstone’s private equity business has been one of the largest investors in leveraged corporate buyouts. But within this past decade, Blackstone has also grown into a behemoth in the commercial real estate industry.
Blackstone (NYSE: BX) estimates the value of its global real estate portfolio is $448 billion, making it the world’s largest real estate company, according to a 2020 report by Fortune. Blackstone reported $684 billion of total assets under management at the end of the 2021 second quarter. Private equity (33 percent) claimed the most share, and real estate (30 percent) claimed the second most. The company also operates in two other segments, hedge fund solutions and credit and insurance. Blackstone had a bit of a down year in the pandemic-ravaged 2020, as its shares gained 15.8 percent. But the company bounced back strongly in 2021; its shares are up more than 105 percent from a year ago.
The company began investing in real estate in 1991, starting mainly by acquiring a series of hotel businesses like Days Inn of America and Super 8 Motels. Nowadays, Blackstone only allocates about five percent of its portfolio toward hospitality assets, and the firm focuses mainly on warehouses, rental housing, and net lease properties. Frank Cohen, Blackstone’s global head of Core+ Real Estate and chairman and CEO of Blackstone Real Estate Investment Trust, told Nareit the pandemic may have changed many things globally. Still, it has not altered Blackstone’s investment thesis that much. “We remain focused on acquiring a diversified portfolio of high quality, stable, income-producing real estate assets concentrated in our highest conviction investment themes,” Cohen said. Cohen noted that the logistics, rental housing, and net lease sectors have resilient cash flows and some of the best fundamentals, which is why they stick with them.
Some real estate sectors have been hit hard by changes wrought from COVID-19, such as retail, office, and hotels, but they comprise a small share of Blackstone’s real estate portfolio. Blackstone’s real estate investment trust, BREIT, owns property across almost all asset classes but has amassed 407 million industrial square feet, 182,000 residential units, 11 million self-storage square feet, and 12 million square feet of data center space. Recently, Blackstone has been highly active in gobbling up industrial/warehouse space, much like other real estate investment trusts and private equity firms. In 2020, Blackstone purchased 13 industrial warehouses from Iron Mountain for $358 million. The portfolio of 13 properties spans 2.1 million square feet in California, Pennsylvania, and New Jersey, and Iron Mountain will continue to use the facilities and enter into a 10-year lease with Blackstone. Blackstone will get a steady revenue stream through rent payments as the warehouses appreciate value, part of another move that pushes the New York City firm even deeper into the logistics market.
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An analyst at Pitchbook said the booming e-commerce industry had turned industrial real estate into “the best performing core real estate type in the last decade,” even before the pandemic blew the lid off e-commerce sales. Supply chain disruptions and the importance of last-mile logistics have also pushed industrial warehouse demand. A recent JLL report said the industrial market could require another one billion square feet by 2025. If JLL’s estimate turns out to be accurate, Blackstone stands to benefit significantly. In June 2019, the company purchased a portfolio of logistics assets from Singapore’s GLP for $18.7 billion. The portfolio spans 179 million square feet and put Blackstone in business with Amazon, GLP’s largest tenant. Later that year, Blackstone also acquired Colony Industrial, a REIT that invests in warehouses, and it purchased 22 warehouses in the U.K. from Clearbell Capital for £120 million ($161 million).
Logistics is one of Blackstone’s highest-conviction investment themes, and that trend looks likely to continue. Logistics accounted for just two percent of the company’s real estate portfolio in 2010. Still, that number has since grown to 38 percent by the end of 2020, making it Blackstone’s largest sector exposure. The company’s logistics holdings are so extensive now that they rival the REIT king of warehouse properties, San Francisco-based Prologis. Combined, Blackstone and Prologis own about 1.6 billion feet of warehouses worldwide. But even with those two big fish at the top, the logistics sector is still highly fragmented. In the United States, JLL reports about 14 billion square feet of logistics space late in 2019.
Blackstone launched Link Industrial Properties in 2019 to operate its warehouses, which will likely focus on last-mile facilities that help enable rapid delivery to big metro centers. Blackstone’s heavy investment in industrial and logistics could be a huge boon given the forecasted growth of e-commerce. Material Handling & Logistics reports that e-commerce sales grew between 39 and 44 percent in 2020, and CBRE predicts that by 2025, e-commerce will account for 26 percent of all retail sales in the U.S. A challenge in many parts of the U.S. and global market will be to build enough distribution facilities to meet demand. If facilities aren’t built fast enough, it could push industrial rents up even higher than the record rates they’re at now. It’s not a bad problem to have for firms like Blackstone and Prologis that control so much industrial space.
Aside from its industrial holdings, one of Blackstone’s other high conviction investment themes is in the rental housing market. The company bolstered its portfolio in that area over the summer of 2021 when it purchased Home Partners of America (HPA) in a deal for $6 billion. Acquiring HPA gave Blackstone control of more than 17,000 single-family homes nationwide. HPA has a unique strategy with its high-quality portfolio of single-family rental homes, providing a path to homeownership to tenants. Prospective residents work with real estate agents to find HPA homes, and then HPA leases them the home and includes an option to purchase the house at a predetermined price. The strategy enables HPA to buy homes with long-term tenants lined up and a clear exit strategy put in place. Blackstone has a history of investing in single-family rentals, and several factors are driving their purchase of HPA. The company sees strong fundamentals in the SFR market, partly because younger generations prefer the flexibility of renting over buying. Rising home prices and tight inventory have also made purchasing a home harder, further boosting the rental market.
Blackstone also knows real estate investors like the income generation and potential upside of SFRs. Single-family rentals produce steady incomes and benefit from rising rental rate growth and home values. Rents on SFRs have seen their largest gains in 15 years, up 5.3 percent year over year in April 2021. Other institutional investors have jumped into SFRs aggressively, too, such as Invitation Homes, Blackrock, and Fundrise. Blackstone’s financial resources will certainly help HPA grow, while the company’s investors benefit from strong market conditions for SFRs. Blackstone already has a history of being ‘America’s landlord’ after scooping up houses following the 2009 subprime mortgage crisis via Invitation Homes. A source told Axios that “Blackstone is basically betting on the continued supply-and-demand imbalance in U.S. housing, which it doesn’t see policymakers successfully addressing any time soon.”
Blackstone reported its best-ever earnings in the third quarter of 2021, and real estate was one of the primary engines behind the growth. The company invests in most real estate asset classes, but logistics and the rental housing market are its two highest-conviction investments. Through big deals and acquisitions in the past few years in those two sectors, the company seems primed to continue to benefit its investors. The industrial and rental housing market are both forecasted to see growth in upcoming years, and Blackstone will likely be there to scoop up the earnings. The pandemic has changed many things since 2020, but Blackstone remains focused on an investment thesis that hasn’t changed much. It’s one of the reasons why co-founder Schwarzman is one of the wealthiest men in the United States, and Blackstone has the most valuable real estate portfolio on the planet.