Blackstone was a big winner of the last crisis. Now, it hopes to repeat the feat, albeit using a somewhat different playbook.
In 2008, Blackstone emerged as one of the biggest beneficiaries of the subprime crisis, becoming a trailblazer in financialising rents. As that crisis went global, so too did Blackstone’s property empire. By the time the dust had settled, it was the most significant commercial real estate company on the planet, according to Fortune magazine.
Now, Blackstone wants to repeat the feat, albeit using a somewhat different playbook. At the Goldman Sachs Financial Services Conference, held on December 9, Blackstone’s CEO, Stephen Schwarzman, gave a few hints about how it plans to do just that. Asked if he thought large firms such as Blackstone would once more gain more market share during this crisis, he responded:
I think something similar will happen. You always have winners and losers. Blackstone was a huge winner coming out of the global financial crisis. And I think something similar is going to happen.
During the last crisis, Blackstone pioneered the buy-to-rent scheme by snapping up, for cents on the dollar, huge batches of foreclosed homes from struggling and bailed-out banks and then turning them into rental properties. In short order, Blackstone’s subsidiary Invitation Homes became the largest owner of single-family rental homes in the United States. It also took the meaning of “absentee landlord” to a whole new level, as accusations of ill repair and poor maintenance quickly mounted. Tenants also complained about excessive rent increases and fees.
Waiting for “Blood in the Streets”
Once the model was up and running in the U.S., it was quickly exported to cities in Canada (Toronto) and Europe (Berlin, Madrid, Barcelona, Dublin, Stockholm…). Since going public in 2007, Blackstone has multiplied eightfold the equity capital it devotes to real estate, to $163 billion. As Scharzman himself put it, the company’s strategy in post-crisis Europe essentially involved “waiting to see how beaten up people’s psyches get, and where they’re willing to sell assets … You want to wait until there’s really blood in the streets.”
As Blackstone’s property empire grew and grew, it managed to convince regulators in the U.S. to allow it to transform part of that empire into rent-backed structured securities. It paid Moody’s, Kroll, and Morningstar lucrative fees to rate a large chunk of those securities AAA. And when the securities began to sour just a few years later after a Blackstone securitisation saw a big drop in rental income, Blackstone managed to convince the Obama administration to bail it out by providing explicit government guarantees for the higher-rated tranches.
Now, around half of Blackstone’s earnings come from real estate, with much of it coming from commercial property. In its role as a commercial landlord, the company holds the fate of hundreds of thousands of struggling small and large business tenants in its hands. In the U.K., it is already facing a growing backlash after its commercial real estate subsidiary, the Arch Company, began hiking rents for some tenants amid a global pandemic. Those tenants include florists, cafés, breweries, gyms and mechanics, many of whom have been sledgehammered by the recent crisis. But they’re unlikely to find a sympathetic ear from their landlord.
In his chat with Blostein, Schwarzman didn’t just brag that his firm had emerged as “a huge winner” from the global financial crisis; he also boasted about his firm’s big earnings off high rents, which is a bit rich (pun not intended) amid a global pandemic that has ripped the livelihoods of untold millions of residential tenants asunder and upended the business models of untold millions of companies:
“Just to give you some idea how this breaks, we pick the good neighbourhoods, if you will. Real estate has a lot of different sub-asset classes. And we’ve concentrated on logistics. It’s about 36% of all the real estate we own. We’re the largest owner of real estate in the private world. And that asset class has boomed with huge increases in rent, almost no occupancies* and rent collections from almost everyone.”
(* Presumably he meant vacancies)
Problems in Spain
In some of Blackstone’s biggest property markets, the pickings are no longer as rich as they used to be. In Spain, residential rents were already peaking in many major cities before the virus crisis plunged the economy into its deepest recession on record. Now they’re plunging. And house prices are expected to do the same. There is also a moratorium on evictions. Plus, the centre-left Sánchez government has extended the minimum duration of rental contracts, which has hampered institutional landlords’ ability to turf out the existing tenants of newly acquired properties as quickly as possible to jack up rents for new ones.
None of this is good news for Blackstone, which owns some 100,000 real estate assets in the country, including a huge portfolio of impaired assets, such as defaulted mortgages and the homes that back them, and real estate-owned assets (REOs), that are controlled via dozens of companies. Now, it has begun to offload some of those assets.
In the U.S., Democrats passed legislation that would create a one-year eviction moratorium, which could prevent Blackstone and other Wall Street landlords from turfing non-paying tenants out of their homes during a pandemic. But the bill is being blocked by Senate Republicans, to whom Schwarzman donated $35 million during the election cycle as well as an additional $15 million.
During the Goldman Sachs video conference, Schwarzman hinted that his firm may soon start buying up more residential real estate in the U.S., this time concentrated in the suburbs, to which many families have relocated in the wake of recent lockdowns. But the firm is not taking its eye off urban areas; it’s just waiting for prices to fall low enough:
“In the suburbs, for example, suburban residential has turned out to be quite a good place to be. When the cities get cheap enough, then you go back to doing that. So, there’s a lot of interesting things. Every part of the firm is really operating full out, which, if you would have asked me in April whether anything like this would have been possible, you’d have to say no.”
Central Banks Back to the Rescue
In April, markets were crashing. Then, little by little, the trillions of dollars that had been conjured up by the Federal Reserve and other large central banks began to feed through to the financial markets, which in turn began to re-levitate, creating an even more bifurcated economy. As mom-and-pop businesses hit the wall in droves and millions of people lost their jobs, the Fed bailed out shareholders whose stocks were plunging and rescued investors of high-risk assets that were in the process of imploding, such as highly leveraged mortgage REITs. The bigger the investor, the more money they got.
Private equity firms such as Blackstone were close to the front of the queue. Despite having on hand an estimated $1.7 trillion of so-called “dry powder” — uninvested but committed capital — private equity firms were big beneficiaries of the emergency loan programs launched in the CARES act. Many of the firms they owned ended up receiving millions of dollars in low-interest PPP loans from the Small Business Administration (SBA). In the U.K., private equity groups won a similar concession in September, allowing U.K. companies they own to access emergency state-backed loan schemes.
P.E. firms such as Blackstone also benefited in a more subtle way from the Federal Reserve’s pledge to buy up to $700 billion of corporate paper, including junk bonds and bond ETFs. In the end, the Fed had only bought $13 billion in corporate bonds and bond ETFs as of early December. Still, its jawboning spurred one of the largest junk bond-buying binges in history. And PE firms were among the biggest beneficiaries. The second quarter saw one of the highest-ever levels of junk-bond issuance by private equity-backed companies, at more than $31bn.
In the knowledge that it enjoys the tacit and, at times, explicit backing of the Fed and the U.S. Treasury and with over $150 billion of dry powder — more than any other P.E. firm — Blackstone is branching out. According to Schwarzman, it has expanded into 11 new business areas with 33 different products since the global financial crisis:
“We used to just do very high return products. Now we do things that are intermediate and things that for us are low, which are 8% plus, but if you’re in the fixed income business, you think that’s pretty high. And we’re expanding globally, doing that type of strategy.”
One area Blackstone has recently moved into in a big way is, ironically, life sciences. Just two weeks ago, it bought a 2.3-million-square-foot portfolio of lab buildings on a 30-acre campus next to Massachusetts Institute of Technology. That was shortly after recapitalising BioMed Realty, the largest private owner of the life-sciences property in the U.S., for $14.6 billion. The firm is also on the verge of acquiring another two life-science buildings in the Boston-Cambridge market for $1 billion, according to sources cited by the Wall Street Journal reported.
The life-sciences sector has been one of the few silver linings for commercial real estate during the pandemic. While most office workers continue to stay home, life-sciences jobs often require special equipment and infrastructure, making it harder to work remotely.
“You can’t create a new drug from your living room or kitchen. You need to be in physical lab space,” said Nadeem Meghji, Blackstone’s head of real estate for the Americas.
Blackstone has also been snapping up warehouse space worldwide to profit from the burgeoning e-commerce business. It is also exploring ways to monetise the client data of the almost 100 companies it has acquired over the years, according to a recent Bloomberg report.
Coincidentally, that story broke just weeks after Blackstone completed its $4.7 billion acquisition of Ancestry, the global leader in digital family history services that has also expanded into DNA testing and advanced genetic health screening. Over 3 million paying customers from more than 30 countries have sent samples of their DNA to Ancestry so that the company could tell them where their ancestors originated from. Now those samples belong to Blackstone.
Blackstone insists it will not have access to Ancestry user DNA or family tree data. But not everyone is convinced. Alan Butler, interim executive director and general counsel of the Electronic Privacy Information Center, said the deal raises privacy concerns. It gives private equity firm access to health data.
“The big concern when there is a big deal like this is that investors might be interested in that data for other reasons, and not in the ways that consumers intended when they gave over that information,” Butler said in an interview with CBS News.
Given Blackstone’s track record at monetising just about everything it can get its hands on, Butler’s concerns are probably well-founded. But it’s ultimately in crisis-ravaged real estate where Blackstone seeks to continue to find a goldmine. Anchored by generous political contributions and fuelled once again by desperation capital pouring out of central banks and governmental treasuries at a time of deep economic crisis, the company hopes to strengthen its grip on bricks and mortar at every level and in many countries.
Source: Naked Capitalism
Author: Nick Corbishley
30th of December 2020
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Comment on the above post by our reader:
Everybody seems to be comparing this looming recession with what happened in the 2008 crash, then stating the housing market is going to plummet and property investors are going to pick up dirt cheap property and become the real winners of the Covid Recession. However, personally, I do not believe this is a fair comparison.
I have various reasons why but the big difference to me is the causes of the two recessions; 2008 was caused by subprime mortgages, toxic debt, overzealous lending, etc… These were all intricately linked with mortgages hence peoples homes and therefore, of course, the housing market suffered greatly because it was the epicentre of the crash. This recession now is nothing to do with subprime mortgages or irresponsible lending, it is due to a pandemic affecting businesses ability to trade.
In 2008 there were 1,000’s of homeowners just handing keys over to their lender because they were given a mortgage of 125% of the property value and now it is worth only 75% these repo houses swamped the market where there was little demand other than cash investors because the banks stopped granting mortgages to anyone other than a completely safe bet – this drove the prices down. It is not the same world now as it was back then, after the 2008 crash the UK Government conducted an investigation called the Mortgage Market Review (MMR) and implemented new legislation to prevent irresponsible lending and make it far more difficult to be granted a mortgage. The MMR is the reason why this recession will not be anywhere near as bad as 2008, the rules have made it so current lenders and lenders have a much larger safety buffer, thus unlikely to see the number of repossessions as we did in 2008.
I understand a lot of people have lost their jobs during this pandemic and it will indeed reduce the amount of demand in the housing market. But the vast majority of these jobs are lower paid positions where the employees are probably not able to buy anyway. Others on higher paid jobs are going to be working in a non-retail/leisure sector and can probably work from home.
The latter types of people are the ones that are driving the huge demand we have in the market at the moment – wanting to move out of the city and into the suburbs as they no longer need to go into the office.
Like I said Demand is very high at the moment which some would argue is as a result of the stamp duty relief, but these people are still going to want to move after the SDLT ends.
Not only is demand very high but at the moment the supply of properties coming to the market is very slow. In Greater Manchester where I live on average, there are 3 buyers bidding on each house. Say demand drops 33% in the next year, this will still leave 2 buyers for every 1 house, and this assumes the supply will stay the same, when in fact it will probably drop as well with homeowners looking to consolidate and wait out the recession.
Blackstone who is mentioned in the article is a massive Commercial Real Estate Investment firm. But a lot of there portfolio is Retail/Office/Leisure which has suffered during the pandemic. Industrial is the only commercial property you want at the moment.
From: u/Tnpenguin717 (Reddit)