Kathleen McCarthy shares how she’s positioned her company’s $550B portfolio to meet rising inflation. Senior housing is in demand as more Baby Boomers enter their golden years. An investment group helps close an eight-figure deal for Google’s new digs in the Windy City. Meanwhile, an L.A.-based developer shuts down production on its new project in Austin, Texas until the economy shows signs of strengthening.
Blackstone's $550 billion playbook for higher inflation
Good morning. In today’s email: The world’s largest commercial real estate owner shares how the firm is dealing with rising interest rates, inflation, and an impending recession. Once considered a niche investment, senior housing is in demand as more Baby Boomers enter their golden years. An investment group helps close an eight-figure deal for Google’s new digs in the Windy City. Meanwhile, an L.A.-based developer shuts down production on its new project in Austin, Texas until the economy shows signs of strengthening.
🎧 Podcast of the Day: With inflation rising, the stock market ping ponging and housing prices softening, middle class Americans who form the backbone of the US economy are now being hit on all sides. In the first episode of The Big Take podcast, Bloomberg reporters take a look at why the middle class is feeling so anxious.
READY FOR ANYTHING
Blackstone's Kathleen McCarthy Has Big Plans Ahead For $550B Real Estate Portfolio
Kathleen McCarthy, global co-head of Blackstone Real Estate (BX), took to the stage at the Urban Land Institute's annual fall meeting this week to outline her property preferences and how being a mom provides skills helpful in her job.
Planning for inflation: McCarthy said about 80% of Blackstone’s $550B real estate portfolio is invested in warehouses, hotels, rental houses, and lab office space, all of which will benefit from anticipated limited supply going forward. "We are entering this tougher economic moment with capital and cranes more in check now than they have been in prior cycles, which positions our real estate assets to do quite well," she said.
Industrial and multifamily assets: Due to the growing need for warehouse spaces, which have vacancy rates below 3%, McCarthy projects a 30% rent growth for industrial assets in the U.S. alone. In the multifamily sector, due to the housing shortage, Blackstone has turned its attention to student housing, closing a $13B acquisition of American Campus Communities (ACC).
Demand for travel: While the hospitality industry may have taken a hit from the pandemic, this sector is still “high conviction” for Blackstone. Trends indicate that the demand for travel has increased and Blackstone has set its sights on beachfront property in key destinations like Hawaii and the Maldives, along with their recent acquisition of Crown Resorts (CWN).
The bottom line: So how is Blackstone dealing with rising interest rates, inflation, and an impending recession? They are really just staying the course. McCarthy believes that “real estate is in a better place than it’s been in other economic environments.” Blackstone’s $550B real estate portfolio, which McCarthy helped build since before the Great Recession to handle a high interest rate environment, is positioned “where the wind is at our back” and can offset the impacts of higher debt costs, worsening cap rates and rising prices.
Senior Housing is Booming, But Managing Senior Communities is Complicated
Once considered a niche investment, senior housing is in demand as more Baby Boomers enter their golden years. But investors may need to overcome some challenging hurdles before they can realize profits.
A recession-proof sector: Some experts believe that senior housing investments could be “recession-proof.” More of an umbrella term, senior housing encompasses a wide array of assets, including independent living facilities, age-restricted communities, residential care homes, assisted living facilities, and nursing homes.
The lifespan problem: That being said, people are living longer these days. Increased lifespans extend the amount of time a senior tenant remains in regular housing and delays their transition—if it happens at all—into senior housing. However, future demand for senior housing is still projected to outweigh supply, a positive sign for investors.
Expensive labor: Senior housing assets are very labor-intensive, which makes them a tricky investment. Due to the vulnerable population of aging tenants, senior housing requires specialized (and expensive) staffing to keep senior facilities safe and operational. Labor costs, combined with escalating prices, inflation, and high interest rates, are enough to keep some investors away from the sector altogether.
WINNING IN WINDY CITY
Meet The Man Who Turned Chicago's Google Dream Into Reality
Quintin Primo, co-founder of Chicago-based Capri Investment Group, helped orchestrate Google’s (GOOGL) $105M deal to buy Chicago’s Thompson Center.
Google’s new digs: Utilizing an inside relationship with a key Google executive, Primo helped close the deal for Google’s recent $105M purchase of the Thompson Center. Google plans to expand its Chicago offices into the 1.2M SF government building at LaSalle and Randolph streets and maintain up to 5,000 employees there.
Saving downtown: Primo’s Google deal prompted the Illinois state government to cancel their plans to move back into the Thompson Center. They decided instead to move into the former BMO building, also bought by Primo. Primo believes Chicago’s Google deal could help revitalize the demand for more housing in the Loop.
Once penniless: The successful investment manager has had his fair share of losses in the past. After a deal with the Swiss Grand Hotel tanked in 1988, Quintin Primo spent several years, “wandering in the desert penniless.” It wasn’t until 1993 that he caught a break after Connecticut’s state pension fund gave his company $60M to manage.
Kilroy Realty Halts Austin Stadium Tower Project Due to Broader Economic Conditions
LA office developer Kilroy Realty (KRC) plans to reduce development spending to $400M as part of a strategy to hold onto cash to invest when more motivated sellers surface on the market.
Impacted developments: One of the developments that have been put on hold is Kilroy’s 500K SF Stadium Tower development in Austin, Texas. The firm will not resume construction until they are able to prelease a ‘substantial’ portion of the project. Kilroy has also delayed projects in Santa Monica and San Diego.
Long-term strategy: The firm originally planned to cut development spending to $600M in 2022, but now plans to bring that number down to $400M. “There are times to buy, times to sell, times to develop, and times like now to be patient,” says Chairman and CEO John Kilroy. We suppose that’s pretty self-explanatory.
The bigger picture: Vacancy rates in office spaces have risen from 12.1–12.5% nationally within the past year. Kilroy executives expect their office portfolio, which is 91% occupied and 93% leased, to remain resilient and stable. The company also reported $276M in revenue in Q3, up roughly 19% from the previous year.
📰 Editors' Picks
Leasing slowdown: Boston Properties Inc. (BXP) slows down leasing in tech and life sciences, anticipating an increase in vacancies next year.
Empire state of mind: Starbucks (SBUX) is planning to open a one-of-a-kind, 23K SF retail store that spans three floors in the Empire State Building.
Winter is coming: Proptech companies are trying to bring down heating costs in offices and multifamily units ahead of the oncoming cold as demand for sustainable heating tech rises.
Sign of a recession? Here’s why another government bond yield inversion hitting the Treasury market leads some experts to suspect a recession is truly on the horizon.
Double the rates: The European Central Bank doubled interest rates to a decade-high 1.5%, showing signs of progress in its battle against rising inflation.
🤝 Deals & Dealmakers
Ross on Hudson: Stephen Ross’s The Related Companies has finally filed plans for its 1.3M SF Hudson Yards office tower on West 36th Street.
Universal Orlando: OpenStreet Capital and JDCAPO have acquired Legacy Universal from Legacy Partners for just $129M, which is probably less than you thought.
On Park Avenue: L&L Holding Co. has completed its 47-story office tower on Park Avenue in NYC. And it’s already 85% leased, too.
Building up biotech: Biotechnology REIT IQHQ received a $581M loan in construction financing for its Elco Yards office and life science campus in Redwood City, CA.
Under the sea: A 4-acre waterfront property in Boca Raton, Florida hit the market for $43M. The catch? It’s mostly underwater, which could pose some challenges.
📈 CHART OF THE DAY
U.S. Mortgage Rates Top 7%, Highest in More Than 20 Years
The 30-year fixed-rate mortgage broke 7% for the first time since April 2002. 30-year fixed-rate mortgage averaged 7.08 %, up from last week when it averaged 6.94%. A year ago at this time, the 30-year FRM averaged 3.14%.
😎 MEME OF THE DAY
💼 JOB BOARD
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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.