How KKR, Blackstone, SL Green See The Real Estate Market Right Now
Amid unprecedented global political turmoil, a possible recession on the horizon and record amounts of capital looking for a shrinking number of good deals, the world's biggest real estate players are shifting their strategies to prepare for what uncertainty may lay ahead.
“When we were coming out of 2012, 2013 and 2014, when we were more early stages of the recovery, we would execute on maybe on a gut renovation of an asset, an adaptive reuse from an office building to a hotel,” KKR Head of Real Estate Americas Chris Lee said on a panel at Bisnow’s National Finance Summit Tuesday.
“We have adjusted our strategy over the last couple years, as this cycle has pushed on … [Now] we want to see the majority of value creation happen in the first 12 to 18 months," Lee added. "A lot of that is really around the uncertainty we see in the environment … If you look at an office building, for instance, leasing three years from now, a lot of people have a very different view of what that may look like.”
Wesley LePatner, the global chief operating officer of Blackstone’s Core+ Real Estate business and the COO of Blackstone Real Estate Income Trust, agreed that at this point in the cycle, it is prudent to be focused on opportunities where you see high-growth potential in order to “insulate” yourself for the future.
“Some of our highest-conviction investment themes right now are last-mile logistics, office and housing,” she told the audience, adding Blackstone is focused on cities in the U.S. and around the world that have job and population growth, universities, research centers and a growing life sciences industry. She noted Blackstone has been increasingly active in the West Coast markets.
“We are really focused on those markets and those asset classes where we see tailwinds from disruption,” she said.
Blackstone has doubled down on industrial in the last year. In June, it announced the purchase of a 179M SF portfolio of U.S. industrial assets from Singapore-based GLP for $18.7B. It has also been snapping up industrial assets in New York City, paying at least $129M for a group of properties near John F. Kennedy International Airport.
Meanwhile, it has continued to raise enormous amounts of capital. Just this month, Blackstone closed a $20.5B raise for its ninth global real estate fund, the largest property fund ever raised. The new fund will be able to buy $41B of assets, and most of the money will be deployed in North America.
Panelists Tuesday discussed debt and equity in the current climate, the impact of New York's stricter rent regulations on asset values, making the most out of the opportunity zone program and how a downturn could affect markets across the country in different ways.
SL Green co-Chief Investment Officer David Schonbraun said over the last few years, the New York City-focused REIT has “been moving more towards a development model where you can build to a higher yield.”
He pointed to One Vanderbilt, the firm’s ground-up, 1,410-foot-tall office tower in Midtown East that is now topped out, and renovated buildings like 460 West 34th St., as the sort of offering tenants are demanding.
“You are getting paid more to take out a bit of development risk, and the returns are much higher and there is a lot more demand in New York for that new delivery,” he said, while acknowledging you can never be sure exactly what kind of market you will be leasing into. “You have to be comfortable that in today's world, it works."
Recession talk has dominated financial headlines in recent months. The inversion of the 10-year U.S. Treasury yield curve sparked alarm, and this week the United Nations’ trade and development body released a report saying a downturn next year is a real possibility.
The types of assets best equipped to weather the next cycle, however it plays out, was a major topic of discussion at the summit. Square Mile Capital CEO Craig Solomon said his firm is now focused on what he calls the intersection of “tech and media” and the types of real estate opportunities that presents.
“Content is being provided through streaming, and that has changed the market,” he said, adding that providers are spending big on content, and companies want to control their space — and want their senior executives in the same location as the studios.
Last month, Square Mile joined with Hackman Capital Partners to buy MBS Group's portfolio from the Carlyle Group, which includes the MBS Campus, a 587K SF studio facility in Manhattan Beach, as well as MBS’ service platform. Last year, Square Mile also joined with Hackman to buy CBS Television City in Los Angeles for $750M.
“It’s become a real estate business, and we are trying to follow that trend. It's cycle-resistant, it’s not immune, but it’s cycle-resistant,” he said. “If we are in a recession, people don't go to dinner as much, they don't travel. They watch more content.”