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Blackstone’s Real Estate Co-Heads On Their Next Big Investment Bet, The Market Recovery And Career Lessons Learned

Blackstone upended the real estate world once.

It spotted the opportunity in logistics early, at the bottom of the market, buying hundreds of billions of dollars of industrial assets and reaping huge profits.

Now the company is looking to repeat the trick by capitalising on the digital revolution. 

“The scale of the data centre opportunity is immense,” Global co-Head of Blackstone Real Estate Nadeem Meghji told Bisnow in an interview. “It's the single most exciting strategy we have globally today.”

Earlier this year, Meghji stepped up from his role as head of North American real estate at Blackstone to lead the world’s largest real estate manager — $337B of assets under management and counting — alongside co-Head Kathleen McCarthy, as the sector emerges from a trough created by sharply rising interest rates. 

Blackstone's Nadeem Meghji and Kathleen McCarthy

With $65B of capital to spend on real estate, McCarthy and Meghji sat down to talk with Bisnow in their first joint interview, a deep dive into the bellwether firm's strategy and processes.

On the agenda: Why the firm thinks 2024 will be a great year to invest, the huge push it is making into data centres, why Europe is proving such a fertile hunting ground and how Blackstone is using artificial intelligence to sharpen how it underwrites deals. 

Meghji also talked through what he learned from his first deal at the company — far from his best — and outlined his path to the top via China and India.

Meghji joined Blackstone in 2008, just as the financial crash was unfolding, and for him and his peers who arrived around the same time, joining a company with money to spend as the market imploded was fortuitous timing.

“You learn very quickly about some of the mistakes that had been made [in the run-up to the crash],” he said. “At a time when most others were still managing through their own issues, being at a business where you had leadership that was focused on offence and capturing a moment of opportunity was really fortunate. It allowed for me and everyone around me to participate in a really exciting moment and get lots of investing experience.”

The period after the collapse of Lehman Brothers is when Blackstone streaked away from its peers to become the biggest investor in the sector. But Meghji's first deal in 2009 hardly shot the lights out, which is why he thinks it was so important.

Blackstone's Meghji said that the the fall in long-term interest rates and inflows to bond funds are among the signals that now is a good time to invest in real estate.

Meghji and his colleagues worked on a deal to buy a pair of regional malls in Portland, Oregon, and Tampa Bay, Florida, in partnership with a public company. Viewing them as B+ malls in A- locations, he was excited by the trade. Blackstone was dipping a toe back in the regional mall market and buying at values 40% below pre-crash levels. It seemed like a great investment.

But while the deal made a profit, it underperformed many of the other investments the firm made at the time and taught Meghji the importance of picking not just the right asset but also the right sector. 

“I think one of the hallmarks of our business is that we pay close attention to how our investments perform, and we try to learn from them,” he said. “The lesson learned was the mall business is much more difficult because of some of the headwinds relating to e-commerce and that this was probably a place where we needed to be more cautious.

“As a result of that, we essentially avoided investing in the U.S. mall business starting in 2010. It's so much easier to produce strong investment performance when you're in an asset class that has underlying secular tailwinds.”

When it comes to the sector with secular tailwinds today, Blackstone has made no secret of the fact that data centres are its next “high-conviction” investment theme, as McCarthy put it. 

The company had dabbled in data centres over the past decade. But in 2021, it ramped up its activity in the sector with the $10B purchase of listed developer and operator QTS. Since the acquisition, Blackstone has grown the company’s development pipeline from schemes with a value of $1B to more than $18B in the U.S. and Europe. 

In December, Blackstone formed a $7B joint venture with Digital Realty to build four hyperscale data centres in Frankfurt, Paris and Northern Virginia. It is also reported to be in talks to buy Irish data centre development and construction firm Winthrop Technologies for about €800M ($875M).

“Data centres [are] definitely an example of where many years ago we took a giant step back and said, ‘What's happening in the world, what's happening with technological transformation, and which real estate asset classes are going to benefit from that?’” McCarthy said. 

Blackstone's McCarthy said that the opportunity in data centres began with the shift to cloud computing and has been turbocharged by AI.

High demand for data centres preceded the rise of AI, as companies moved business data processing and storage as well as digital transaction activity from on-site locations into the cloud, she said.

“And the sector plays to our strengths in that it is complex and requires a lot of capital,” McCarthy added. “In QTS, we saw the opportunity to take a business that was trading at a discount and take its value to where it should be by providing it with consistent capital.”

An explosion of interest in AI brought about by platforms like ChatGPT certainly doesn’t hurt the thesis. Meghji pointed to the $1T figure floated by OpenAI CEO Sam Altman as the digital infrastructure investment required to support the widespread adoption of AI. A significant portion of that will go into data centres, he said. 

“AI has put a turbobooster on demand, and you look at the commitment the big technology companies are making, the computing power they are planning to invest in, that tells you a lot about the downstream demand for the real estate,” McCarthy said. “But that's just one part of the ecosystem of demand for data centres.”

Blackstone has been using AI to augment its real estate investment processes, employing a team of 50 data scientists, McCarthy said. A real estate deal team will often have a data scientist embedded in it to provide alternative insights and ways of analysing a transaction. 

“You get someone to be a partner who has a different skill set and who has the ability to find new answers to great questions that our team can ask,” McCarthy said. 

Blackstone was looking at a deal to buy market-rate rental apartments in Reno, Nevada. The assets had performed well over the previous few years, but the team wanted to know more about why before it could be confident investing.

The firm’s data scientists scraped data from job-listing sites, company registrations and corporate announcements on office moves, all of which showed that technology companies were shifting locations in a way that would particularly benefit Reno. 

For Meghji, it is a long way from where he started in real estate. Born in Canada and growing up in Vancouver, British Columbia, and Toronto, he decided to get into real estate after taking a class at Harvard Business School.

But rather than taking the traditional path when he left university in 2006 and joining an established firm, he decided to set up his own investment firm. If that wasn't hard enough, he decided to try to invest in two of the most notoriously opaque countries in the world.

“I decided to try to go do real estate deals on my own, with big ambitions and dreams but absolutely no experience or capital,” he said. “And to make it more difficult, I thought it would make sense to pursue those deals in China and India, both at the same time.”

After realising living on a plane between the U.S., China and India was unsustainable, he decided to join a larger firm. Sixteen years after arriving at Blackstone, he is one of the figures leading the firm's investment charge as the market emerges from its worst downturn since his career began.

Along with data centres, Meghji and McCarthy said Blackstone will be sticking with the other sectors where it has invested big in recent years: logistics, student housing, hospitality and rental housing. 

And while last year saw its number of acquisitions and sales dip lower than Blackstone’s average over the past five years, the company is ready to start investing that $65B of equity in earnest. 

Since buying the business in 2021, Blackstone has grown QTS' development pipeline from $1B to $18B.

“It sounds a little trite, perhaps, but we really haven't been waiting for the all-clear sign. We’ve been deploying in this moment of dislocation because we're looking forward, not backward,” Meghji said, pointing to deals like the Digital Realty JV, the $3.5B acquisition of listed single-family rental owner Tricon Residential, and the purchase of a $1.2B stake in a portfolio of loans being sold by Signature Bank. 

What gives it the confidence that now is a good time to invest and the market isn’t heading for another significant decline? Constant speculation about when the Federal Reserve will start to cut interest rates aside, long-term interest rates are already well below their October peak, bringing down the cost of borrowing by 200 basis points or more, Meghji said. 

Inflation data is erratic, but data from external bodies and from within its own portfolio companies suggests the trend is downward. More money has been put into bond funds than at any time since 2021, he said, implying that debt capital markets are in a healthy place.

The company’s deal pipeline is also fuller than at any time in the last two years. 

“So you're seeing their debt market begin to heal, credit availability increase, and the bid-ask spread between buyer and seller is narrowing,” he said. “Our pipeline is growing, our activity is increasing, and there's a real sense of optimism about where we're heading. The sentiment broadly is still negative, and for us, that makes it a great time to lean in.”

The sentiment is particularly negative in Europe, Meghji added, although the region has been more active recently, a trend that is likely to continue. 

When she talks to investors in Blackstone’s funds, McCarthy said, the big thing they want to know is how much of the pain is behind them regarding value declines and how much is still to come. 

“As we said on our recent earnings call, because of our expectation on rates, we think that real estate values are bottoming out,” she said. “But that doesn’t mean it will be a V-shaped recovery. 

“The challenge, I think, for many investors is that not all of their managers have marked their portfolios to reflect the realities of what happened over the past couple of years. So I do expect that you will continue to see managers and financial institutions taking more marks and making more reserves.”