No deal too large for Blackstone's real estate investors

New York

NOTHING - not a trade war with China, not the prospect of a slowing global economy, not a run-up in asset prices - can curb Blackstone Group's appetite for property. And, as one of the world's largest real estate investors looks for more to buy, the sky's the limit on size.

"Anything is really possible," Kathleen McCarthy, Blackstone's co-head of real estate, said in an interview with Bloomberg Television. "There's just less competition."

Blackstone's chief executive officer Steve Schwarzman has long preached the virtues of scale. In a market where real estate assets "feel fairly fully valued in a lot of places", that's an added advantage, she said.

The New York-based firm can deploy more capital faster and with greater certainty in complex situations.

Including two deals since June for a total of almost US$25 billion, Blackstone has acquired a billion square feet of warehouse space in the past decade.

Ms McCarthy said that logistics remains her highest-conviction bet, followed by offices and rental housing in so-called innovation centres such as Seattle and Stockholm, and "high-quality" travel destinations in coastal markets.

Blackstone's play on e-commerce has shifted from large regional warehouses to smaller spaces in densely populated cities, because that's what customers such as Amazon need to guarantee next-day or even day-of deliveries. By buying up multiple locations in the same areas, Blackstone gains control over supply, and with it pricing power. "We see technology totally transforming the way goods move from businesses to people," said Ms McCarthy, who co-heads real estate with Ken Caplan. "Our clients want to be as close as they can get to the ultimate consumer."

There is at least one serious competitor: Prologis, which currently owns even more warehouse space in the US, has announced US$14 billion of logistics deals in the past four months.

E-commerce is not the only hot spot in real estate. Low interest rates have spurred demand for everything from nursing homes to apartment buildings.

One consequence of all that competition for assets is ever-rising prices and, in residential areas, the soaring cost of housing.

It's such a problem on the West Coast, including in technology centres where Blackstone has been buying up rental properties, that Microsoft, Google, Facebook and Apple Inc have committed a total of US$5 billion to alleviate the shortage of affordable space.

While local governments in cities such as San Francisco have focused on price as the main barrier to affordability, Ms McCarthy said the real issue is lack of supply and barriers to construction, such as zoning laws.

"We can be a much bigger part of the solution," she said. "We are evaluating today a number of opportunities that would help us really add supply."

As of Sept 30, Blackstone had US$157 billion of investor capital in its real estate business. Its two classes of real estate funds, Opportunistic and Core+, generated gross returns of 13.6 per cent and 8.7 per cent, respectively, over the prior 12 months. BLOOMBERG