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 portfolio."

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. Caplan said.

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 peter.grant@wsj.com

 

(END) Dow Jones Newswires

January 19, 2021 09:47 ET (14:47 GMT)

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