Inside The Story: Blackstone Hands Over Keys On Dublin Office Portfolio

For the world's largest real estate investor, a €2.5B ($2.9B) Dublin buying spree over the past decade has been quite the roller coaster. 

In August, Blackstone agreed to hand over three Dublin office assets to lender Starwood, walking away from the remnants of a portfolio it bought in 2019 for €535M, one of the largest Irish office deals of the recent cycle.

Blackstone's wins in the volatile Dublin office market include the €900M spent on offices leased to Meta and Salesforce at the start of this decade, assets that look set to benefit from rental growth. 

But the consensual agreement with Starwood is the second time it has ceded control of major assets to a lender in Dublin — Goldman Sachs took over Ireland's biggest shopping mall in 2020, in another high-profile and loss-making exit.

Three Dublin office assets are a drop in the ocean for Blackstone's $325B real estate business, but how they ended up being handed back to lenders is an insight into why the firm has, in the main, eschewed office investment for the past decade.

And how Starwood manages the portfolio of which it is now in control — and how the offices fare in a patchy leasing and sales market — will be closely watched in Dublin and beyond. 

Blackstone bought the Cedar portfolio of five Dublin offices totalling 600K SF from Starwood Property Trust in late 2019 for €535M, a deal that netted a €110M profit for Starwood.

That Starwood division, plus Starwood European Real Estate Finance, a listed fund the firm manages, provided a €70M mezzanine loan as junior lender, and senior debt for the deal was provided by Pimco.

Following its purchase, Blackstone offloaded two of those offices: Blocks A and B of Parkgate Business Centre to Union Investment for €24M in 2021, and The Watermarque Building to Corum Eurion SCPI in 2022 for around €92M.

The remaining three buildings are 75 St Stephen’s Green, Iveagh Court and Marsh House at 29-31 Adelaide Road, all in Dublin's central business district.

The 221K SF Iveagh Court is the portfolio’s biggest asset by size and rent, with tenants including Mercer, the Central Bank of Ireland and the Office of Public Works. The 103K SF 75 St Stephen's Green was arguably the highest-profile of the assets and houses Allied Irish Banks, Kildare Partners and several financial and professional services businesses.

The portfolio was bought just before the pandemic, which hit office leasing across the world. But Dublin has been battered: Tech tenants, which expanded fast in the city in the run-up to and immediate aftermath of the pandemic, have since cut back significantly on leasing. 

And since 2022, capital values have fallen as rates have risen. The perfect storm hit the occupancy and value of the portfolio, and by last year, Blackstone had written down its remaining €106M equity position in the assets to zero.

Following the handover, The Sunday Times in Ireland reported that experienced Irish operator Pat Gunne had been lined up by Starwood to advise on the future of the Cedar portfolio, while Blackstone has maintained that the assets represent a tiny fraction of its huge real estate portfolio and had already been written off its balance sheet.

Starwood declined to comment on its immediate plans. Prior to taking the portfolio back, it had flagged its exposure to the assets, which it described as “historically well tenanted, albeit certain assets are expected to require capital expenditure to upgrade to Grade A quality to retain existing tenants upon future lease expiry events.”

In October last year it wrote down the loans by 50% and more recently said that the board considered that there was a wide range of possible outcomes regarding loan recoverability.

Gunne has a track record in taking over distressed assets for banks, and the playbook in such situations is well established: Invest in upgrading assets, lease them up and sell them if or when the value rises above the level of the debt.

Starwood can take some encouragement from HWBC’s first-half office review and outlook report, published on Monday, which says Dublin by the end of the decade faces a significant shortfall in high-quality office space with A building energy ratings.

Takeup in the first half reached nearly 1.1M SF, with a further 1M SF already reserved. HWBC said it expects full-year leasing activity to exceed 2M SF. Of the 1.4M SF under construction in Dublin, around 67% is already committed, leaving just 450K SF of new space coming to market and no further speculative development in the pipeline beyond 2026.

“Given the timescales involved in office development, there is a potential supply gap looming, and unless new projects are brought forward, it will become a real constraint on choice, flexibility and future growth,” HWBC Director of Office Agency Paul Scannell said of the findings. 

It is the second time in the past five years that Blackstone has given control to lenders in Dublin. 

Last year, U.S. investment bank Morgan Stanley financed Strategic Value Partners' circa €560M acquisition of the 1M SF Blanchardstown Centre mall. That is a value nearly €400M less than the €950M Blackstone paid for it in 2016, before it in turn handed back the keys to lenders including Goldman Sachs in 2020 at a value €200M less than it paid.

While prime retail assets have staged a recovery over recent years, at the time of the divestment, Blackstone determined that the investment and asset management required for Ireland’s largest mall was not worthwhile amid pandemic impacts.

It took the same view with the Cedar portfolio — the ups and downs of the valuation curve meant it was not convinced that remaining as holder of the portfolio made sense for its investors.

Part of this is structural. While Blackstone’s total real estate funds are enormous, it runs each in a silo, so any further investment in the Cedar portfolio would have to have come from the existing investors, a move Blackstone did not feel made sense given the valuations being achieved for Dublin office buildings.

Despite the exit from the Cedar portfolio, Blackstone insisted that it remains committed to the Dublin market. While it views the city’s office sector as more volatile and with a more concentrated tenant base than in many other markets, it also believes that the longer-term direction of travel in Ireland has been positive.

In the commercial office space, Blackstone’s standout asset is the flagship LEED Platinum-certified Salesforce building in Dublin’s north Docklands, which Bisnow toured just ahead of its opening, while it also took a €400M stake in Meta's headquarters in Ballsbridge.

“It’s exactly the sort of asset that everyone is looking for — long-term lease, fabulous location and great occupier,” Blackstone Head of Real Estate Europe James Seppala told Bisnow about the Salesforce asset. “We're long-term holders, and those are the features that set the benchmark for office buildings in the market.”

And given Blackstone’s different investment strategies, Seppala said the firm could be acquisitive while divesting assets at the same time in a certain market.

Seppala also pointed to the company’s extensive industrial and logistics portfolio across the country, which has the only English-speaking capital in the EU, and said that Blackstone remained interested if the right office and logistics opportunities in Dublin and across Europe came up.

He added that Blackstone, like other investors, had observed a “real bifurcation in outcomes,” with its high-quality assets performing more strongly than anticipated.