With Stuy Town megadeal, Blackstone shows willingness to play the long game

Fund manager to invest more heavily in low-risk real estate

TRD New York /
Oct.October 20, 2015 04:53 PM

“We want to own this property for a very long time,” Jonathan Gray said at a press conference Tuesday at Stuyvesant Town-Peter Cooper Village, the massive housing complex which Gray’s Blackstone Group had just agreed to buy for $5.3 billion.

To market observers, Gray’s words may have come as a surprise. Like most of its private equity peers, the fund manager is known for high-risk, leveraged buys of properties it intends to exit within a few years at hefty profits.

But this deal is different: Blackstone and its partner Ivanhoe Cambridge are each spending around $1.3 billion of their own funds on the deal, according to sources, meaning only half the acquisition is funded by debt. And the buyers, who promised to keep all 11,232 units as rentals — half of them rent-stabilized for 20 years — aren’t chasing sky-high returns or eyeing a quick flip.

So, what’s going on with Blackstone?

“I think the important thing to note here is the kind of capital we’re using,” Gray said Tuesday. The company is buying Stuy Town through its Blackstone Property Partners, a fund it launched in July 2014. Unlike Blackstone’s giant opportunistic funds, which often target annual returns of around 20 percent, BPP is its first fund hunting for lower-risk, lower-yield real estate with longer holding periods.

“This kind of asset, this irreplaceable asset is really perfect,” Gray said of Stuy Town. “I think it goes to the return expectations we have.”

The mere fact that Blackstone considers Stuy Town a lower-risk asset shows how much the market has changed since 2006, when Tishman Speyer made its high-octane purchase for about the same price. Of course, back then interest rates were much higher than they are now, and the income from the complex was about half what it is today.

Although not the fund’s first purchase, the Stuy Town deal, brokered by Eastdil Secured’s Doug Harmon, is by far BPP’s biggest, and raises the value of its real estate holdings from around $12 billion to $17 billion, according to a source familiar with the company. The open-ended fund has raised around $6 billion in equity from investors, the source said – primarily from pension funds looking for safe, stable investments. Recent deals through BPP include the $605 million purchase of an office building at 1740 Broadway from Vornado Realty Trust.

For Blackstone, the push into core real estate is an attempt to address a dilemma faced by all private real estate funds: it’s never been easier to raise capital, but with more players gunning for deals it’s become harder to deliver high returns. Some funds are tackling this issue by entering new markets or structuring creative deals. Others, like Blackstone, are embracing lower returns on some deals.

“The core-plus asset class is about three times the size of what we’re doing in the opportunity class,” Blackstone’s co-founder and CEO Steven Schwarzman said in an earnings call last year, adding that the company could well add $100 billion worth of core-plus assets within the decade.

Opportunistic funds, however, remain central to Blackstone’s business. This year, the firm raised $15.8 billion for its largest-ever opportunistic fund, Blackstone Real Estate Partners VIII. The fund took part in the $26.5-billion acquisition of GE Capital’s real estate portfolio, and is buying Strategic Hotels for $3.9 billion.

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