Blackstone's Pre-Covid-19 Portfolio Shifts Have Turned Out Well
By Peter Grant
The pandemic has slammed some of the major property types, but
changes that Blackstone Group Inc. made to its real-estate
portfolio over time have helped the investment firm navigate
through the fallout.
In the years before Covid-19 hit, Blackstone altered its
property mix based on changes taking place in the economy and
technologies. While investors at the firm weren't preparing for a
pandemic, their moves to gradually reduce exposure to certain
real-estate categories have since served them well.
Retail and lodging, for example, have been the two hardest-hit
commercial-property types during the pandemic, as travel nosedived
and consumers migrated to online shopping with many stores closed
or limiting capacity because of Covid-19.
In a global real-estate portfolio that Blackstone values at $341
billion, retail real-estate holdings make up only 5% of equity
value, compared with 19% in 2015, according to the firm. Changes in
equity value result both from firm investment decisions and changes
in market valuations.
Hotels account for 7% of the equity value, down from 23% in
2015. Lodging was nearly half the portfolio's equity value in 2010,
when Blackstone controlled Hilton Worldwide Holdings Inc. and owned
many lodging properties.
Blackstone said that traditional U.S. office space -- which
doesn't have specialized features such as labs for pharmaceutical
companies -- accounts for 5% of its equity value, compared with 19%
in 2015. Most office space has remained unoccupied during the
pandemic, and many analysts remain skeptical that it can return to
previous levels even after the pandemic, as many companies embrace
work at home.
The firm also increased industrial space to 36% of its
real-estate equity value, from only 9% in 2017, boosting its
exposure to this hot category. Industrial real-estate investment
trust shares gained 12.2% last year, according to an index from
real-estate data analytics firm Green Street, compared with a 5.1%
decline in its general REIT index.
Blackstone didn't get every call right. Its real-estate
portfolio includes European malls that face problems. The
investment firm also has a small investment in senior housing, a
property type that has gotten clobbered during the pandemic because
of escalating expenses and falling revenues.
"Obviously not everything's perfect," said Kenneth Caplan,
co-head of Blackstone Real Estate. "But we feel great about our
Blackstone isn't the only big investor with pre-pandemic changes
paying off now. Aberdeen Standard, one of the largest real-estate
investors in the U.K., has about 24% of its portfolio invested in
retail compared with over 40% one decade ago, according to Bill
Pekowitz, a portfolio manager with the firm.
And most real-estate investors have been moving in a similar
direction. Retail properties accounted for 23.5% in the first
quarter of 2014, according to an index of the National Council of
Real Estate Investment Fiduciaries, a benchmark for many firms.
Retail is now down to 18.9%, while industrial has increased to
20.5% from 13.5%, according to the index.
Blackstone's strategy has been to look for ways the
business-world shifts affect demand for commercial property, Mr.
Caplan said. "The focus for us is: Where do we have these higher
convictions?" he said.
One of those convictions has been in the growth of e-commerce.
That trend accelerated during the pandemic when consumers sought to
avoid the potential risk of contracting coronavirus while shopping
in stores by doing so online. "You had multiple years of expected
growth [in online retail] compressed into the past year," Mr.
Blackstone's appetite for traditional office space declined
partly because businesses were using amenity-rich spaces to lure
workers. These businesses have been passing the cost of space
improvements onto landlords who have had to spend more on designing
and building out office spaces.
Blackstone, instead, has focused on office space that
specialized in certain tenants, such as biotechnology lab space and
entertainment companies in Hollywood that want to be close to
studios. Those bets also turned out well during the pandemic, as
billions of dollars flooded into research on Covid-19, and demand
soared for streaming series and other movie and television content
from consumers in hunker-down mode.
Write to Peter Grant at firstname.lastname@example.org
(END) Dow Jones Newswires
January 19, 2021 09:47 ET (14:47 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.