Amid a market dislocation, even the world’s largest real estate owner is expecting capital deployment to become more challenging.
Blackstone has maintained strong deployment in real estate to date. The New York-based private equity real estate giant invested $11.2 billion in real estate capital during the third quarter and $64.8 billion over the last 12 months, according to its latest earnings results. Deployments during the 12-month period included the privatisations of American Campus Communities for $12.8 billion in August and PS Business Parks for $7.6 billion in July.
The investment numbers represent a slight decline in activity from the $14.3 billion in third-quarter deployment, but a significant uptick from the $37 billion in LTM deployment, reported during Q3 2021. At the time, Jon Gray, Blackstone president and chief operating officer, had observed that “deploying capital at scale has gotten easier”, particularly as the growth of the firm’s perpetual life vehicles has facilitated large-scale transactions.
Looking ahead, however, “I would expect deployment will be muted for a bit of time”, Gray said during Blackstone’s third-quarter investor call last Thursday. “Until you get a little more certainty out there, until people become more confident about inflation starting to head down and that rates have hit their peak levels, I think you’ll see a slower level of transaction activity.”
With banks de-risking and credit spreads widening, “the cost of capital if you’re buying a company or buying real estate has gone up materially”, he added. Still, this does not mean the firm will stop pursuing investment opportunities. “Because of our unique spot, if anyone can get a financing done somewhere, it’s us,” Gray said. “And I think you’ll see some examples of that in the not-too-distant future.”
Some sellers will potentially provide seller financing or take back equity in a transaction to get deals done, he added: “There’s a lot of creativity in the deal market. And I think that some of that will emerge in this uncertain environment.”
Meanwhile, Gray pointed to a couple of silver linings in the current market environment. “We’re in a much better spot as a global economy than we were back in 2008-09. We don’t have the same kind of overleverage we had back then in housing, in commercial real estate, in banking institutions. So that makes you feel better, but there’s no question there is a slowing coming here.”
Additionally, during times when debt is cheap and abundant, buyers need to pay a lot for assets. “We’re definitely better off as investors in an environment like today where capital is more scarce, where we may have to over-equitise the deal and then ultimately finance it when markets calm down a bit in the future,” he remarked.
Blackstone is not under pressure to transact, either. “The key for us is that we don’t have to be forced investors at any time, neither buyers nor sellers,” Gray said. “So if there is a slowdown in market activity, we can afford to be a little patient. And then when opportunity emerges, we can move. And I would just say that as our platform grows, I think you’ll see us be able to do more and more even in a tougher environment.”
Blackstone’s real estate assets under management held steady at $319.3 billion during Q3 2022, down slightly from $320 billion in Q2 2022. The firm’s total AUM grew to $950.9 billion during the third quarter, up from $940.8 billion in the previous quarter.