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.
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.
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.
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.