Taking advantage of its large reserves and the down real estate market, Blackstone Group LP is betting that commercial real estate values will improve as the economy recovers. According to a recent Wall Street Journal article, Blackstone, already a major player in the commercial real estate market, is being very aggressive on commercial real estate right now, believing that once the economy picks up, commercial real estate values will rebound due to the lack of new development in recent years. Jonathan Gray, co-head of Blackstone’s real estate group, is quoted as saying that the lack of new property supply has made the property outlook “better than people would expect.”
Blackstone is adding to its holding by acquiring the remainder of an $800 million portfolio of commercial office properties that Morgan Stanly bought for approximately $1.4 billion from Glenborough Realty Trust at the height of the real estate boom in 2006. In order to make the deal work, Blackstone pulled together virtually all the pieces of mezzanine debt held by different banks, insurance companies and collateralized debt obligations, thereby becoming the single largest creditor on the properties. Morgan Stanley, having already lost about $100 million on the portfolio, is making the transfer to Blackstone rather than repay the $820 million due next month on the properties. The office building portfolio contains about three million square feet of space, with properties in Roslyn, Virginia, San Francisco, and La Jolla, California. The buildings are about 80 to 85% occupied.
Blackstone has about $41 billion in real estate assets under its management, and has raised $4.6 billion of a proposed $10 billion global property fund. The Glenborough/Morgan Stanley acquisition is another indication of Blackstone’s bet that now is the time to buy commercial real estate at depressed prices in the global economy. Blackstone continues to acquire distressed properties in its strategy of buying low and holding onto the properties until the market picks back up. Examples of this strategy are Blackstone’s purchase last month of $1.1 billion from Duke of 82 office buildings in seven markets, mentioned by this blogger in an October blog, as well as Blackstone’s involvement in the purchase of Extended Stay’s portfolio out of the bankruptcy court. Earlier this year, Blackstone paid $9.4 billion for a portfolio of shopping centers from Centro Properties Group which had $8 billion in debt at the time.