Blackstone real estate seeks rebound

Blackstone’s real estate division is seeking a rebound from recent losses and shock exits. The market was brutal, and the group’s profit is tracking at half its 2022 peak. In an effort to raise morale, Steve Schwarzman, the billionaire founder, invited top leaders from the real estate business to his Manhattan apartment for dinner in June.

During the meal, Schwarzman emphasized the importance of real estate to Blackstone’s legacy and future. He expressed confidence that market conditions were improving and that the group would lay the groundwork for a $30 billion fundraise later in the year. However, the five months since have brought more tumult, including the announcement of Nadeem Meghji‘s plans to leave as head of the unit.

Meghji’s departure, less than 10 months after the departure of his former co-head Kathleen McCarthy, has raised concerns about the group’s stability. Jon Gray, who built the real estate business and remains actively involved, has tapped David Levine and Giovanni Cutaia to shore up the unit. The duo has nearly 30 years of Blackstone experience between them and will seek to revitalize a unit that went from the firm’s fastest-growing segment to its slowest.

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Levine and Cutaia will need to persuade investors that they can steady the ship and close new deals before raising more money. According to Levine, “There are big opportunities that could accelerate deployment, but we’ll remain very disciplined investors, as we always have.” The new leaders inherit an operation with roughly $309 billion in assets under management, including nearly $47 billion awaiting deployment across a dozen portfolios.

New Leaders Take Helm

The anticipated flagship fundraise has been delayed. Levine and Cutaia see opportunity in warehouses, hotels, and grocery-anchored retail, all of which have benefited from a recent lull in new development.

The group is working against a market hamstrung by high interest rates, with property values tanking since the Federal Reserve started hiking interest rates in early 2022. Lower values haven’t created buying opportunities, with many would-be sellers waiting for a recovery. Cutaia said, “There are still headwinds in the capital markets given interest rate volatility.”

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Challenges Persist Despite Gains

Blackstone’s real estate funds are saddled with expensive assets that are hard to sell, with the flagship fund known as BREP IX generating annualized net returns of 3%. The group is running a secondary process for Blackstone Property Partners, an effort to return cash to restless investors, and has cut its management fees for some of those who remain. Other big firms, such as KKR & Co. and Carlyle, are facing similar challenges in the real estate market.

The boom in artificial intelligence has offered some reprieve, with the June sale of three fully leased Northern Virginia data centers helping to lift real estate’s returns to a four-year high in the second quarter.

The firm’s real estate division will need to remain disciplined and focused on its long-term strategy to regain its footing. They must persuade investors that they can manage the challenges and capitalize on new opportunities. The firm’s overall performance will likely be closely tied to the fortunes of its real estate business, with the Federal Reserve’s interest rate decisions playing a significant role in shaping the market.