Blackstone real estate seeks rebound from shock exits and losses

[NEW YORK CITY] Steve Schwarzman was concerned. It had been a rough stretch for Blackstone’s real estate division. The market was brutal, and the shooting death of Wesley LePatner at the firm’s New York headquarters nearly a year earlier still weighed heavily on the group.

To try to raise morale, Schwarzman invited top leaders from Blackstone’s real estate business to his Manhattan apartment for dinner in June. The billionaire founder and his handpicked heir apparent, Jon Gray, wanted to see firsthand how they were holding up.

Over the course of the meal, Schwarzman played both coach and cheerleader. He emphasised how important real estate was to Blackstone’s legacy and to its future. He was confident that market conditions were finally improving. Under new leader Nadeem Meghji, the group would lay the groundwork for a US$30 billion fundraise later in the year. 

Lifting spirits further, staff members delivered periodic updates from the NBA finals game underway at Madison Square Garden: The New York Knicks continued to defy odds and expectations. Anything seemed possible.

But the five months since have only brought more tumult for a group that was once a crown jewel for the US$1.4 trillion firm.

In September, Meghji, the head of the unit, announced his plans to leave, less than 10 months after the departure of his former co-head Kathleen McCarthy. The real estate market is getting slammed yet again by higher rates, the group’s profit is tracking at half its 2022 peak, and the anticipated flagship fundraise has been delayed.

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Blackstone’s most recent financial results revealed another disappointing quarter for the real estate group. Distributable earnings for the group fell 10 per cent from the same quarter a year earlier, assets were down US$30 billion from their peak, and its opportunistic strategies lost 3.2 per cent in three months.

Blackstone’s private equity division has dethroned real estate as the most profitable business in the firm.

The firm tapped David Levine and Giovanni Cutaia to shore up the unit, all under the watchful eye of Gray, who built the business and remains actively involved. The duo has to persuade investors that they can steady the ship, and they need to close new deals before they can raise more money. 

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“There are big opportunities that could accelerate deployment, but we’ll remain very disciplined investors, as we always have,” said Levine. “If the transaction environment is slower, we’re not going to rush.” 

The new leaders will seek to revitalise a unit that went from Blackstone’s fastest-growing segment to its slowest.

“We feel incredibly confident in the people we have at the firm, our succession planning, the continuity we have,” Gray said last month in a Bloomberg TV interview. Levine and Cutaia “have stepped right in”, he added. “They’re very capable and our investors have a lot of confidence.”

A star is born

While every big buyout firm boasts of its real estate investments, it’s hard to overstate its importance to Blackstone. In 1992, Gray joined the firm fresh out of college, just as Schwarzman was building the strategy. Gray quickly moved from the private equity division to the fledgling real estate group.

Gray became co-head of the group in 2005, then managing US$4 billion. Two years later, he led the US$39 billion acquisition of Sam Zell’s Equity Office Properties Trust and Blackstone’s investment in Hilton. By 2009, Blackstone was the largest landlord in the US.

He also added an Asia-specific strategy to the growing international portfolio and created real estate investment trusts (Reits) designed to tap the growing retail market. When he rose to president in 2018, Blackstone gave Gray’s real estate group credit for half the firm’s earnings for several years.  

In the post-Gray era, Ken Caplan and McCarthy oversaw the pandemic boom, reducing the group’s exposure to offices and increasing industrial and logistics investments. BReit – the retail vehicle that became the envy of the industry – swelled to more than US$70 billion.

When rising rates sent skittish investors fleeing BReit in late 2022, Gray sent Meghji to San Francisco to secure a US$4 billion investment from the University of California, a sign of confidence in the fund. Meghji, who was then leading the Americas real estate business, worked through his honeymoon to clinch the deal. 

In 2024, Caplan was promoted to co-chief investment officer of the broader firm, and Meghji joined McCarthy atop the global group. 

Their loose division of labour was well understood within Blackstone: Meghji was the dealmaker, McCarthy handled clients and investors. At the same time, it was clear that Meghji, who had a warm relationship with Gray, was a rising star.

When McCarthy left, Gray gave Meghji sole responsibility in January, saying “Nadeem is an extraordinary investor and leader, and our world-class real estate business and team is incredibly well positioned moving forward.”

So it came as a shock when, less than 10 months later, Meghji announced his plans to leave by the end of 2026. Gray tried – and failed – to persuade him to change his mind, according to colleagues who were aware of the conversations.

Meghji, who is in his mid-40s, has yet to reveal any future plans; a September statement from the firm said he planned “to take some time with his young family before seeking new pursuits”. People familiar with his thinking say he eventually aspires to start his own venture. 

New blood

Levine and Cutaia entered their new roles with nearly 30 years of Blackstone experience between them.

Levine came to the company in 2009 when the real estate division still felt small, ultimately becoming the head of the Americas group like Meghji before him. Cutaia, who joined the firm 12 years ago, was most recently president of global real estate, where he managed the assets and their operations worldwide.  

“I grew up on the acquisition side of the business and lean into capital deployment,” Levine said in an interview. “Gio has overseen our global asset and portfolio management and also has a deep background in acquisitions. But on all major decisions, we collaborate to get the best of both of us.”

They inherit an operation that had roughly US$309 billion in assets under management as of Sep 30, including nearly US$47 billion awaiting deployment across a dozen portfolios. According to the firm’s most recent filings, nearly one-third of that dry powder sits with the flagship global real estate fund.

That creates a certain amount of pressure for Levine and Cutaia. The firm’s tenth flagship fund has to deploy at least 70 per cent of its US$30 billion before it can pitch investors on a new fund. 

They see opportunity in warehouses, hotels and grocery-anchored retail, all of which have benefited from recent lull in new development. The demand for funding for data centres is another avenue for large investments.

Nonetheless, the group is working against a market hamstrung by high interest rates. Property values have tanked 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.

“There are still headwinds in the capital markets given interest rate volatility,” Cutaia said. “But the fundamentals are moving in the right direction.” 

For now, Blackstone’s real estate funds are saddled with expensive assets that are hard to sell. The flagship fund known as BREP IX, which began investing in 2019, has generated annualised net returns of 3 per cent.

The group is also running a secondary process for Blackstone Property Partners, an effort to return cash to restless investors; it has also cut its management fees for some of those who remain. 

Other big firms are in similar straits: A KKR & Co. opportunistic real estate fund that invested during the pandemic has generated annualised net returns of 3.3 per cent, while a Carlyle property fund of similar vintage returned 1 per cent.

Brookfield – whose massive real estate holdings make it one of Blackstone’s closest competitors in commercial property – managed just 3 per cent from its own opportunistic real estate fund from the same era.

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

Demand for data centres has rippled to the massive warehouses in the portfolio. Nearly 15 per cent are now being used for equipment storage by hyperscalers’ data centres, and leasing volumes in the second quarter were up 30 per cent year on year. 

Then there are the knock-on effects. Biotech firms enthusiastic about the possibilities of AI are expanding, reinvigorating some of the investments that fell out of favour post-Covid. Fast-growing AI companies have also sparked new demand for office space, and Blackstone recently leased a 25-story tower in San Francisco to Anthropic.

Gray described Blackstone’s approach at a conference in Hong Kong on Nov 3, hours before the polls opened in the US. The firm is focused on long-term financial contracts with trillion-dollar hyperscalers.

Given the voracious demand and the constraints of supply, he said, “When I think about what we do in AI infrastructure, I have a tremendous amount of conviction and confidence.”

That may get a fresh test in the coming months. The midterm elections swept a wave of Democrats into office, lifted in part by voters’ concerns about the rapid proliferation of the new technology.

They also gave new authority to long-time Wall Street antagonist Elizabeth Warren, who is expected to chair the powerful Senate Banking Committee. In September, she called for an immediate pause on the development of advanced AI. BLOOMBERG