Schwarzman Dodges Bullet: Boosts Warehouses, Dumps Hotels, Malls

Steve Schwarzman is into warehouses, which has let his real estate assets hold up pretty well, riding the online ordering craze spurred by the virus lockdown. Along the way, his Blackstone property operation also presciently whittled down problematic holdings, such as in shopping malls and hotels.

His private equity colossus, Blackstone Group, had an unaccustomed loss in the first quarter ($1 billion), amid the March stock market selloff. A lot of that was from energy investments. Today, the firm is the globe’s biggest corporate landlord.

Blackstone’s real estate unit did decently in the nasty first quarter. Its assets under management dipped just 1.4% in the January-March quarter (although that was up 14.3% from the year-prior period). The division’s logistics component, a.k.a., warehouses, is about a third of the property portfolio. Real estate has 30% of Blackstone’s $538 billion AUM.

“We realized that online shopping would need warehouses to be able to ship their goods to their customers,” the Blackstone CEO told a conference held by investment manager Bernstein. “And that has been astonishingly successful as a place to concentrate because those shipping costs to the warehouse are very small compared to the entire cost of goods.”

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Blackstone rents out dozens of warehouses to Amazon. The firm likes facilities close to major metro areas. “The rents on those go up so much, much higher than any other asset class,” he said. Blackstone has been spending heavily to acquire these logistics properties. Last year, it bought the US warehouse assets of Singapore’s GLP for a whopping $18.7 billion.

Meanwhile, Blackstone sold off its collection of New York office buildings. This segment of the property industry may face a rough patch with workers reluctant to return to the office, requiring corporate tenants to downsize their space.

Still, over the long-term, Schwarzman told the attendees he didn’t think that offices would suffer greatly. Although remote working “is doing nicely,” he said, there’s great value in face-to-face workplaces, especially for new employees.

“You can’t train new people like this” online, he said. “Those people have to learn your culture. They have to know not just the mechanics of how you do a piece of work but how do we think about it? How do we think about risk?”

In addition to offices, Blackstone pared its exposure to lodging, going from the world’s most sizable owners of hotels four years ago to what Schwarzman called “the single digits.” Similarly, he unloaded malls as he “thought online shopping was going to do enormous damage” to them.

And hotels? “We don’t think that all real estate is created equal,” he said. “Hotels now are mostly empty.”

Blackstone has boosted its real estate AUM eight times since it went public in 2007. Last fall, its property component completed a remarkable capital raise, totaling $20.5 billion.