Blackstone’s Gray: The ‘pillars of a real estate recovery’ are forming

Blackstone’s president says commercial real estate values are bottoming out and expects an uptick in realizations in H2.

Blackstone is ready to call the bottom of the market, as its redemption requests slow and investor confidence starts to repair.

“Investors tend to take their time in terms of pivoting back to the space,” Blackstone president Jon Gray said during the company’s earnings call on Thursday. “It will take multiple quarters of strong performance where people say, ‘Hey, I’m comfortable doing this’ – in the meantime, we should be looking to take advantage of this lack of confidence in the marketplace.”

Gray: The ‘pillars of a real estate recovery’ are coming into place

Gray describing a real estate market that is primed for investment. “We can see the pillars of a real estate recovery coming into place,” he said. “We believe values in commercial real estate are bottoming. [But] this doesn’t mean there won’t be more troubled real estate investments to come in the market, particularly in the office sector.”

Gray is of the view that the Federal Reserve is finished with its rate hike campaign and now likely now moving to make cuts – with the cost of capital appearing to have hit its peak. New construction starts are starting to move down sharply in commercial real estate, he said, which is quite positive for long-term values. A bounce back in the market will not be immediate, however. “I wouldn’t expect a big surge in realizations in real estate in the first half of the year… as you get to the back half of the year and into ’25, you feel better about that.”

The firm name checked the $7 billion partnership with Digital Realty, the joint venture with the FDIC to buy a 20 percent stake in the former Signature Bank mortgage portfolio and the planned takeover of Canadian real estate firm Tricon Residential in a $3.5 billion deal announced last week. The thesis behind the latter acquisition, Gray said, is the fact that majority of the company is in single family rentals – insulating it from the jump in multifamily construction – and the “overall backdrop” of a housing shortage in the US.

“We think this is just the start,” Gray said. “Blackstone Real Estate has $65 billion of dry powder to invest into this dislocated market… We are, of course, not waiting for the all-clear sign and believe the best investments are made during times of uncertainty.”

In real estate the firm increased its total assets under management last year by 3 percent to $336.9 billion, the firm reported. Inflows were at $19.9 billion for the quarter – of which $10.5 billion came from former Signature Bank mortgage loan portfolio acquisition – and $53.9 billion for the year.

Meanwhile, Blackstone raised an additional $1 billion for its seventh European opportunistic fund and $230 million for the fifth real estate debt strategies fund, which launched in December. Blackstone Real Estate Investment Trust raised $813 million in the quarter, though it saw its worst annual performance ever last year, Bloomberg reported this month, recording a 0.5 percent loss in 2023.

That vehicle, hit by repurchase requests since 2022, has now “weathered the storm in real estate markets,” Gray said. Redemption requests dropped 50 percent in Q4 2023 from the previous quarter and down 80 percent since January 2023. “If current trends continue, we expect to be out of proration this quarter,” Gray said.

The firm’s opportunistic funds dropped 3.8 percent in value in the quarter and 6.3 percent for the year, while core-plus funds fell 4.6 percent in the quarter and 4.3 percent through the year. The company deployed $15 billion for the year in real estate.