Blackstone president Jon Gray calls the bottom after office-market rout
He says valuations for US offices have tumbled 50 to 70% from their peak and they’re poised for a rebound
BLACKSTONE, the world’s largest commercial property owner, said the worst is over for the global office market after a prolonged slump fuelled by the pandemic.
“Office has bottomed, particularly in stronger markets and better-quality buildings,” Blackstone president Jon Gray said in an interview before the firm reported fourth-quarter earnings on Thursday (Jan 30). The results showed a surge in profit even as the real estate business slumped.
Valuations for US offices have tumbled 50 to 70 per cent from their peak, he said, and they’re poised for a rebound.
The declaration marks a shift for Blackstone, which has been touting its retreat from the office market. Traditional US offices account for less than 2 per cent of the firm’s real estate holdings. That’s down from more than 50 per cent before the 2008 financial crisis.
Rethink
That could soon change, with Gray saying Blackstone is now evaluating fresh office bets.
The firm is nearing an agreement to purchase a Midtown Manhattan tower, in a return to New York office dealmaking for the investor, Bloomberg had reported earlier.
A NEWSLETTER FOR YOU
Tuesday, 12 pm
Property Insights
Get an exclusive analysis of real estate and property news in Singapore and beyond.
The Manhattan building, 1345 Avenue of the Americas, is jointly owned by institutional investors advised by JP Morgan Global Alternatives and Fisher Brothers.
“We would be willing to buy properties out there,” Gray said.
Gray, 54, led Blackstone’s real estate business for years before rising to become the firm’s No 2 executive, after chief executive officer Steve Schwarzman. His statement is likely to resonate with a real estate industry that’s desperate for relief.
A revival in commercial real estate, which had suffered a sharp decline due to high interest rates and low post-pandemic office occupancy, will be a boon for financial firms that had been grappling with exposure to the distressed industry, from asset managers to banks.
The office market is reeling from vacancies and slumping valuations as many workers who stayed home during the pandemic have yet to return.
Blackstone reported a fourth-quarter profit that topped Wall Street expectations, but real estate continued to drag on results.
Distributable earnings – or profit available to shareholders – rose 56 per cent from a year earlier, the New York-based company said in a statement. It totalled US$1.69 a share, beating the US$1.48 average estimate of analysts surveyed by Bloomberg.
Blackstone’s fee-related earnings jumped 76 per cent to a quarterly record of US$1.84 billion.
Private equity dealmakers stepped up the pace of selling investments, helping drive Blackstone’s realisations to their strongest level in 2½ years. The credit and insurance business increased what it took in from investors in the quarter to finance companies, dominating the firm’s inflows.
Gains in fee-related earnings and distributable earnings at both units helped Blackstone overcome its muted performance in property investments.
The real estate business, a major force in warehouses and apartments, faced an increase in base rates in Q4 – and its bets depreciated during the period. Its fee-related earnings and distributable earnings sank.
Data centres
Data centres helped mitigate further losses for the real estate arm and lifted the infrastructure team’s returns.
The firm has poured ever-bigger sums into power-hungry data centres in a bid to become the largest financial investor in artificial-intelligence infrastructure. Late last year, Blackstone said its portfolio includes US$70 billion of data centres and more than US$100 billion of prospective developments in the pipeline.
Blackstone has benefited from a shortage in the infrastructure to drive AI advances and surging demand for data centres from Big Tech.
Now Chinese startup DeepSeek threatens to complicate that investment thesis.
DeepSeek claims its AI models offer comparable performance to the world’s best chatbots at a fraction of the computing cost. That challenges the idea that AI will require ever-increasing amounts of power and infrastructure.
Watching developments
Gray said the company was closely watching developments tied to DeepSeek.
He said he does not think digital infrastructure has lost its importance.
“DeepSeek says to me the cost of compute is going to come down a lot,” he said. “Therefore the usage of AI and adoption will go up.”
Gray added that Blackstone has US$80 billion of leased data centres today, meaning that a steady stream of cash has been locked in for a chunk of its portfolio.
Even if tech firms invest less in training AI models, this could leave them more money to spend on inference – when an AI model makes predictions – and cloud-processing, Gray said.
“Digital infrastructure remains essential,” he said. “The power and electrification with it is also going to be essential – if anything, more essential – with faster adoption of this technology.”
His comments echo views expressed recently by analysts at Jefferies.
“In fact, we would be surprised to see hyperscalers slow their capex plans as the AI space just got even more competitive,” they wrote.
DeepSeek’s launch has triggered scrutiny from investors, who are expected to analyse tech giants’ AI spending plans closely in the next few weeks.
CEOs of Microsoft and Meta also defended massive AI spending this week saying that it was crucial to staying competitive in the new field. BLOOMBERG, REUTERS
Share with us your feedback on BT's products and services
