An inside look at the investment strategies guiding Blackstone's real estate portfolio — and why it's still betting big on logistics while the competition crowds the asset class
Blackstone, the world's largest corporate landlord, has $46 billion of dry powder allocated for real estate, as the pandemic commercial real estate shakeout begins. Global co-head of real estate Ken Caplan spoke with Business Insider about how the firm is thinking of investing its money in the post-lockdown landscape. Logistics, already the biggest part of Blackstone's portfolio, remains a major opportunity, even as others look to the already crowded asset class. While office, retail, and hotels have all had some ill-effect from the pandemic, Blackstone continues to see long-term tailwinds about the hotel and certain sectors of the office market, while retail is more challenging. Visit Business Insider's homepage for more stories.
When the world's largest corporate landlord Blackstone acquired GLP's logistics assets last year in the largest private real estate deal ever, it was just the tip of a much bigger iceberg. The firm has been laser-focused on the real-world infrastructure that supports e-commerce for a decade, adding over one billion square feet of logistics space in more than 200 separate transactions in that time. Logistics assets are now the largest asset class in Blackstone's portfolio. This strategy was winning before the coronavirus, but now it's looking even better as online shopping soars amid the pandemic. "Logistics is a very popular sector right now, but not one we just decided last week was interesting," Ken Caplan, global co-head of real estate, told Business Insider. Caplan has been thinking about the broader industrial world since he first started at the firm in 1997, and actually worked on the firm's first warehouse purchase in Europe back in the late 90s. The firm's current strategy on logistics took hold around 2010. At the time, logistics was only 2% of their real estate portfolio, and now makes up a third of its $324 billion real estate portfolio. Blackstone, which is currently sitting on a record amount of dry powder, $156 billion, is starting to gear up to invest in assets in the post-COVID world. It has $46 billion allocated for real estate investments. Caplan sat down with Business Insider to talk about how the firm is thinking about investing in the time of COVID. Blackstone, famous for its thematic investing style, is using data from its properties to come up with themes about the changing world, and then investing based on those themes. The pandemic has shuffled some of the deck, but the firm believes that many of the themes it was following continue to remain good investments now. "Our business is driven by investing thematically in sectors with powerful secular tailwinds, like content creation, logistics, and life science," Caplan said. Despite being popular, logistics real estate is undervalued The pandemic's effect on logistics real estate can not be overstated. It turned a hot sector into the hottest sector, as more people used e-commerce for more purchases than ever before. Prologis, the largest REIT in the logistics space, is actually trading at a higher price per share now than it did before the public markets collapsed in late February. REITs in other categories like retail or hotels can't say the same. This has brought more players into the space than ever before. While there aren't many companies that can compete with Blackstone on giant transactions like the GLP deal, more and more players of all sizes are trying to strike gold in the category. Read more: Cold storage is 2020's red-hot real estate play. Here's how the private-equity backed industry leader is spending $500 million to tighten its grip on the market. Still, Caplan and Blackstone continue to see many opportunities for new deals, and new opportunities to make money. The reasoning is deeply tied to the theme that undergirds their investments, e-commerce. Caplan said that the market is still undervaluing just how essential and valuable logistical real estate is, and the market hasn't yet caught up to the realities of what e-commerce means. "There has been such a fundamental shift in utility for this asset and demand for this asset that the value has shifted very meaningfully as well, and we think that it is still under-appreciated," Caplan told Business Insider. There are still great opportunities for the firm, he added, especially in markets that don't have as high levels of e-commerce adoption as the US, such as Europe and parts of Asia. Why offices are still good opportunities On Blackstone's second-quarter earning's call, COO Jon Gray said that the firm would look to invest in offices and hotels, where challenges appear to be more "cyclical," while avoiding the retail sector which has more fundamental "secular" issues. Some think that remote work has the potential to be a long-term threat to offices. However, Blackstone's view here is quite clear: while fully remote work is able to keep businesses operating in a crisis, it poses significant challenges for training new employees, collaboration, and company culture. While some office locations, like New York City, will see significant challenges in the near-term, Blackstone is confident that office demand will return. It doesn't have the same feeling about struggling retail. "One of the challenges in retail is that it oftentimes is not a better experience than the alternative, whereas, with office, it is often a better experience than the alternative," Caplan said, comparing the ease of e-commerce to the struggle of running a building remotely. Read more: Markets for retail and office space are under enormous pressure. A foreclosure in the works for a building on NYC's glitzy Fifth Avenue shopping corridor shows just how bad it's getting. In the office space, Caplan said there are "powerful secular tailwinds" for the life sciences and content-creation/media sectors specifically. Both sectors require in-person activity, whether a lab or a movie studio, which insulates them from the potential downside of an increasingly remote world. These trends, which Blackstone was already invested in, have been bolstered by the effects of the pandemic. Blackstone's life sciences office company, BioMed, is one of the firm's four largest investments, and the firm owns over half of the Class A office space in film studio-rich Burbank, California. Blackstone has already completed another major transaction since the pandemic began: signing a deal in late June for a 49% stake in three Hollywood studios and five offices owned by Hudson Pacific Properties and valued at $1.65 billion. These acquisitions count Netflix, CBS, and Walt Disney as tenants. Disney is also a tenant of some of Blackstone's Burbank office space. Outlook on hotels and retail The hotel industry has understandably been hit extremely hard by the coronavirus, with some hotels having essentially no income at all for the first two months of the pandemic. However, Blackstone still believes that the long-standing trend of increased travel will continue once consumers feel comfortable to travel again. "In other areas where we've had high conviction in a longer-term trend and have seen that trend interrupted, like global travel, we believe it will return over time," Caplan said. Blackstone sold Hilton after 11 years in 2018, but the company still owns hotels. Blackstone hotels that have reopened are beginning to see demand from regional leisure travelers, though business travel will likely take longer to bounce back. Read more: Investments in risky hotel debt could get wiped out as travel gets slammed — and one group of lenders may see an outsized hit While the larger trend of online shopping dims most enthusiasm for the space, some retail, especially a shopping center anchored by a grocery store or a high performing Asian mall, remains an attractive deal. "In retail, we see a more secular change happening, where you have this shift to online or e-commerce that is reducing demand in the space and causing challenges that we don't think will reverse," Caplan said.SEE ALSO: Real estate giant CBRE has an 'unparalleled' amount of data. Its tech chief lays out how it's putting it to good use. SEE ALSO: Real-estate developers are betting on a risky strategy to reimagine retail space in hopes of rescuing struggling shopping centers SEE ALSO: Meet the 4 dealmakers driving Blackstone's $325 billion commercial real estate portfolio. They walked us through how they're thinking about opportunities in the downturn. Join the conversation about this story » NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid
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Here's why big investors like Goldman Sachs, KKR, and Blackstone are betting billions on data centers
Summary List Placement Scrolling through videos on social media may seem like carefree fun, but the...Summary List Placement Scrolling through videos on social media may seem like carefree fun, but the logistics behind it are an increasingly serious business. ByteDance, the China-based parent company of the social media streaming service TikTok, has leased 53 megawatts of data-center space across three locations in northern Virginia, a source with knowledge of the transactions said, facilities that could consume more annual power than 25,000 homes. That's on top of 9 megawatts ByteDance leased in 2019, according to data from DataCenter Knowledge. The company, which has come under scrutiny in recent months from the Trump administration, is just one among an expanding universe of businesses for whom data centers are key. In Totowa, New Jersey, meanwhile, Digital Realty Trust, a $41 billion public real-estate company that is one the country's largest data-center developers, has broken ground on a sprawling 600,000-square-foot complex after locking down a major commitment from Bloomberg LP, the financial data and media firm, several sources with knowledge of the transaction said. A spokesman for Bloomberg did not immediately respond to a request for comment. ByteDance did not respond to an inquiry about its data-center deals. The transactions are just the latest activity in a booming sector that straddles both the technology and property markets. Data-center demand has dramatically risen in recent years thanks to a host of drivers. Those include the growing consumption of storage-heavy streaming content, the proliferating internet-of-things that has connected everything from cars and appliances to remote software and systems, and also the increasing migration of businesses to cloud based storage and applications. Read More: We talked to 8 studio execs, investors, and brokers about the big money pouring into film and TV production spaces. Here's a look at the opportunities — and risks — for this hot real-estate play. The coronavirus pandemic, while causing other areas of the real estate industry such as retail and hotels to wilt, has only given lift to the already surging sector, experts say. The audience data firm Nielsen, for instance, reported that US consumption of streaming content rose more than 30% through the first three quarters of the year to 7.1 trillion minutes as lockdowns and lingering virus concerns have encouraged more viewers to watch from home. And as companies continue to put off a return to the office, more have scrambled to move more of their data and operations from onsite servers into the digital ether so that they can be more readily accessible to employees working remotely. The lynchpin behind all of it are tens of thousands of megawatts of data centers. Big investors like Goldman Sachs and Apollo are jumping in The demand has given a boost to established players in the industry, including public companies such as Digital Realty Trust and Equinix, the largest data center company by market value at over $71 billion. Shares of data center REITs have risen on average by about 25% this year, according to the REIT investment and research firm Cohen & Steers, compared to an overall 12% decline in the broader REIT market, which has been battered by the virus crisis. The industry's performance has also caught the attention of major investment firms that want to make inroads into the lucrative business. On Tuesday, Goldman Sachs announced it had hired Scott Peterson, the former chief investment officer of Digital Realty Trust, and Goldman's merchant banking division plans to invest $500 million from an infrastructure fund to make up to $1.5 billion of data center acquisitions in the US and around the globe. Read More: Real-estate developers are building costly cold storage space before they even have tenants lined up. They're betting the risky move could be a winning investment as grocery deliveries surge. Other bluechip investors have crowded into the market as well. Apollo Global Management announced last week that it purchased a portfolio of nearly 500 existing cellular towers and hundreds of additional tower sites that are under development. That infrastructure is seen as closely linked to the data center business, especially with the arrival of 5G, whose faster speeds will require both more transmission infrastructure and storage space and increasingly seamless connections between the two. In May, KKR said it would invest $1 billion from an infrastructure fund it operates to build and buy data centers in Europe in a venture called Global Technical Realty. And last year, Blackstone announced it had acquired a 90% interest in seven data centers in Virginia owned by the property REIT Corporate Office Properties Trust in a deal that valued the buildings at $265 million. "Global internet traffic has grown 20% to 30% per year and the amount of data in data centers is growing at about the same pace," said Nadeem Meghji, the head of US real estate investments for Blackstone. "And with the arrival of 5G, you'll see the consumption of even more content from people's phones and devices." Meghji also expected broad demand from businesses across the economy to continue to fuel growth. "Only 30% of companies have moved their data storage off premises into a data center so far," Meghji said. "That adoption will grow." Data centers require enormous amounts of power Unlike other property types that have attracted robust investor interest in recent years, such as warehouse space, data centers can be particularly complex and expensive to operate and build. Most require enormous supplies of power, backup generators to prevent outtages, robust ventilation systems to cool football field sized rooms crammed with servers that can reach ovenlike temperatures, and connectivity to established networks of fiber optic cabling that serve as the nation's superhighways for data. Development has nonetheless boomed as capital has flooded in. "You're getting pension funds investing in data centers now, which is a huge change from a few years ago," said Steve Berkman, a real-estate attorney at Paul Hastings in San Francisco who has worked on data center deals on the West Coast. The amount of new colocation capacity in leading data center markets such as Northern Virginia, Dallas, Silicon Valley, and the New York area grew by 5% in the first half of the year to 2.7 gigawatts of total inventory, according to data from CBRE, about 20% of the power consumed by all of New York City. Colocation spaces are akin to the coworking business in the office sector, offering takers flexible space in which to grow their data footprint. They are only a segment of the larger market. Huge data consumers have also been active building and leasing their own facilities. Facebook recently began operating in a $1 billion data center it built in Henrico County in Northern Virginia, the country's largest and most active data center market. The social media giant has outlined plans to more than double the size of the complex. Even more space is on the way, with about 373 megawatts of colocation facilities under construction, CBRE said. All of that supply has put a modest strain on pricing in the industry, with average charges falling from $129 per kilowatt of monthly power consumption to $121 in the first half of the 2020 in those prime data-center markets, according to CBRE. Developers have compensated for tightening profits by building and operating space more economically. Some data-center companies have even begun to experiment with the idea of submerging servers in tubs of mineral oil, which is more efficient at dispersing heat than air and can reduce hefty cooling costs. Microsoft has tested underwater data centers. "A decade ago, the rule of thumb was it cost $40 million a megawatt to build," said Pat Lynch, a senior managing director at CBRE who oversees the company's data center solutions group. "Today it's a quarter of that, so there's still a healthy margin in the business even if prices fall slightly." How a big supply pipeline is changing the competitive landscape The tightening economics and the large pipeline of supply are expected to prompt consolidation in the industry, allowing major players to enhance profitability by gaining economies of scale through acquisitions that avoid the risks of building from the ground up. Digital Realty Trust, according to several sources, was in talks, for instance, to purchase the $8.9 billion rival data center REIT Cyrus One last year, although the deal appeared to fizzle earlier this year. The data-center industry's tenancy is dominated by huge customers such as Amazon Web Services, Microsoft Azure, Google, Oracle, and IBM, which use the facilities both for their own operations and multi-billion dollar cloud computing and storage businesses that cater to corporate and government clients. Smaller companies too have found a niche, highlighting the diverse ecosystem of users behind the demand for data center space. Data Canopy, a Maryland-based cloud-storage provider, has leased space in 16 data center locations across the country totaling about 10 megawatts that cater to small customers. Ryan Barbera, the company's founder and CEO, said he expects its footprint to as much as double in the next year and revenue to pick up by 30% or more. He is already contemplating a first fundraising round for the company. "2020 has been pure growth for us from a business standpoint and the best year that we have ever had," Barbera said. "When Covid happened we frankly began implementing a lot of austerity. Instead, companies that in the past talked about a cloud transformation made the move after realizing it's just as important or more important than other areas of their business at a moment like this." Disclosure: KKR is a large shareholder in Axel Springer, which owns Business Insider. Have a tip? Contact Daniel Geiger at email@example.com or via encrypted messaging app Signal at +1 (646) 352-2884, or Twitter DM at @dangeiger79. You can also contact Business Insider securely via SecureDrop. SEE ALSO: We talked to 8 studio execs, investors, and brokers about the big money pouring into film and TV production spaces. Here's a look at the opportunities — and risks — for this hot real-estate play. SEE ALSO: Meet the 4 dealmakers driving Blackstone's $325 billion commercial real estate portfolio. They walked us through how they're thinking about opportunities in the downturn. SEE ALSO: Nasdaq's CEO says the cloud is the 'future of the industry' and the tech could be used to conduct actual trading within the next decade Join the conversation about this story » NOW WATCH: July 15 is Tax Day — here's what it's like to do your own taxes for the very first time
As the outlook for retail, hotel and office space shifts, some developers are already planning to...As the outlook for retail, hotel and office space shifts, some developers are already planning to convert empty properties to new uses.
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