Despite widespread interruptions and gruelling COVID19 lockdowns, Blackstone remains committed to its high conviction themes which include experience-based travel and logistics.
During the Investment Magazine Real Estate conference last week, Kathleen McCarthy, global co-head of Blackstone Real Estate, maintained the firm’s high conviction in backing hospitality and entertainment assets.
“How countries have had to respond to lockdowns may slow down the pace and show disparate recoveries in hospitality,” McCarthy said.
“But we are already seeing that the hotels we own, are essentially as occupied as we allow them to be. This communicates to us that people want to get out and see the world and get out of their homes.” Watch the full interview with Blackstone’s McCarthy here.
McCarthy pointed to the Cosmopolitan Hotel and Casino in Las Vegas, a 3,000 room marquee asset, which the firm bought in 2014 for $US1.8 billion.
Despite the restrictions on occupancy, the Cosmopolitan reported a higher EBITDA for New Years and the Super Bowl than it did a year earlier.
“Experiential travel was one of our high conviction themes pre-COVID19 and it remains so now,” she said. McCarthy’s comments come amidst speculation in some quarters that Blackstone may increase its holding in James Packer’s troubled Crown Resorts.
The New York-based firm, which controls more than $US300 billion in real estate around the world, bought a 9.99 per cent stake in Crown Resorts from Hong Kong casino tycoon Lawrence Ho in April.
In addition to the Cosmopolitan, Blackstone has owned Hilton Hotels and the real estate of MGM’s Bellagio resort in Las Vegas.
Speaking generally, McCarthy said: “Hospitality assets that were convention oriented will probably take longer to recover back to pre-COVID levels, but our base case philosophy is that it will come back and this mega trend will continue.”
Return to the office
Office space was also blindsided by COVID19 but a trend of decentralising the workforce began pre-pandemic and was accelerated with increasing demand for office space that delivers a better alternative to working in your home – an experience of being with your colleagues and being comfortable, McCarthy said.
“We’ve not been major developers of office space, with a few exceptions like those in India,” McCarthy said.
“But we think people are going to return to the office, particularly knowledge centers, where tenants want to create an ecosystem around life science research, content creation, and technological innovation.”
Logistics real estate has been a strong performer for Blackstone, which the company invested in significantly in 2010 coming out of the Global Financial Crisis. The company now owns $US100 billion worth of logistics assets.
While Blackstone originally focused on warehouses, the pandemic has prompted the real estate investor to concentrate on ‘last mile’ locations, as ecommerce continues to penetrate both developed and emerging markets.
“Tenants are striving to be closest to their ultimate consumer, so we look for last mile locations,” McCarthy said.
“We have a large portfolio in Australia and we often see the places where it’s hardest to add supply there is the greatest demand, so the logistics theme remains compelling.”
Multifamily real estate is a crowded space, but Blackstone is confident its ability to operate at scale and the speed of its investment process can allow it to outperform.
“We’re not the only one with this idea,” McCarthy said. “When we bring in capital to upgrade properties to make them pleasant places to live and bring in high-quality management, we’re offering a good and in most cases a pretty affordable option for tenants.”
Cautious on retail
Contrary to the positive megatrends affecting live entertainment and office space pre-pandemic, bricks and mortar real estate remains under pressure and Blackstone is cautious.
“We haven’t bought a traditional shopping mall in the United States in a decade,” McCarthy said. “But we try not to be too dogmatic, just because the sector is under pressure.”
McCarthy points to opportunities in grocery shopping anchors in dense urban areas, as well as shopping malls in emerging markets like India.
“There’s much less retail square footage generally, and the rising incomes and growing middle class are lifting both brick and mortar retail and e-commerce delivery,” she said.
That said, the looming threat of rising interest rates and an uptick in inflation remains an important consideration for Blackstone.
“We’ve been investing with a philosophy as if interest rates were going up and that we might be facing inflation. Our investment philosophy was built around trying to find sectors, cities, and asset classes where we thought we could outgrow from a cashflow perspective,” McCarthy said.