Private equity giant reports stable property values in Q2 while positioning for market turnaround
Blackstone Inc., the world’s largest alternative asset manager, signaled growing confidence in a commercial real estate recovery during its second-quarter earnings call, citing declining new supply and improving capital market conditions as key catalysts for the sector’s eventual turnaround.
The New York-based firm, which manages over $1.2 trillion in assets, has been positioning itself for a real estate rebound since calling the market bottom 18 months ago. Chief Operating Officer Jonathan Gray emphasized that the recovery fundamentals are now falling into place.
“The good news now is it’s all about a question of when, not if, because the building blocks for this recovery are clearly coming into place,” Gray said during Thursday’s earnings call.
Supply Shortage Driving Recovery
The most significant factor supporting Blackstone’s optimistic outlook is the dramatic decline in new construction. Gray highlighted that building activity has fallen by two-thirds from peak levels in key sectors.
“Because of the 2/3 decline in building in the U.S. from the peaks in terms of logistics and apartment construction, you’re going to begin as we get towards the end of this year and into next year to have a much more favorable supply-demand dynamic,” he explained.
This supply constraint is expected to create pricing power for existing properties as demand begins to outstrip available inventory. The firm noted that projects started two to three years ago are still coming online, creating temporary excess capacity, but the pipeline of future supply has dramatically diminished.
Capital Markets Show Improvement
Financing conditions, another critical component of real estate recovery, have also improved significantly. Gray noted that debt spreads have returned to pre-crisis levels after reaching wide spreads in 2023, while Federal Reserve rate cuts are expected to further reduce borrowing costs.
“Some of it’s base rates, which you highlighted, and obviously, the Fed cutting rates will be helpful. But some of it’s spread, and those have come back now, back to pre-Liberation Day levels,” Gray said.
The improving capital environment is already showing results in transaction activity. “Transaction activity for smaller assets has definitely gotten better. You see that for both apartments and logistics in the U.S. There’s a little more liquidity in Europe now as well,” Gray reported.
Portfolio Performance and Strategy
Blackstone’s real estate values remained largely stable during the second quarter, with some appreciation in opportunistic funds and its flagship retail product, Blackstone Real Estate Income Trust (BREIT). The stability came despite broader market volatility that saw the S&P 500 fall 14 percent early in the quarter.
Data centers emerged as a particular bright spot, driving gains across multiple Blackstone real estate strategies. The firm has strategically positioned its portfolio around secular growth trends, with data centers, logistics, and rental housing comprising approximately 75 percent of its global equity portfolio and nearly 90 percent of BREIT.
BREIT itself showed signs of recovery, recording its best quarter of regular fundraising in 2.5 years with $1.1 billion in new capital, while investor redemption requests continued their downward trajectory. The fund has delivered 9 percent net annual returns since its inception 8.5 years ago, approximately double the performance of public REIT indices.
“BREIT’s highly differentiated portfolio positioning has led to 9 percent net returns annually since inception 8.5 years ago, approximately double the public REIT index on a cumulative basis,” the company reported.
Challenges Remain in Select Sectors
Not all segments of Blackstone’s real estate portfolio performed equally well. The firm’s Core+ platform experienced modest declines, primarily due to challenges in its Life Sciences office portfolio. These properties have been impacted by new supply coming online and increased tenant caution in the sector.
However, even in this challenged area, Blackstone sees eventual improvement. Chief Financial Officer Michael Chae noted that Life Sciences office construction starts are “down something like 80 percent plus since sort of their peak a few years ago,” which should ultimately benefit the sector through reduced future supply.
Fundraising Recovery Signals Market Confidence
The improvement in BREIT’s fundraising reflects growing investor confidence in real estate markets. Gray noted that there’s “definitely now more openness to allocating to the space” among institutional investors, with the firm engaging in more conversations about real estate allocation.
Blackstone also successfully raised capital for a dedicated Core+ real estate industrial strategy, collecting several billion dollars from investors seeking exposure to logistics and industrial properties.
Broader Market Implications
Blackstone’s real estate outlook comes as the broader alternative investment industry watches for signs of recovery in what has been a challenging sector. The firm’s scale and market position often make its assessments closely watched indicators of sector trends.
The company’s confidence is bolstered by its track record of market timing. As CEO Stephen Schwarzman noted, “In real estate specifically, we called the bottom of the cycle 18 months ago. And since then, we’ve been actively investing across our real estate equity and debt strategies.”
Looking Ahead
While Blackstone executives expressed growing optimism, they acknowledged the recovery timeline remains uncertain. Gray emphasized that the pace of recovery will depend partly on how quickly interest rates decline.
“If rates come down faster, obviously, the recovery is quicker. If they don’t, then new supply will continue to be muted, and then the recovery will take a little more time,” he explained.
The firm expects to see continued improvement in transaction activity as policy uncertainty diminishes and business confidence returns. Gray noted that Blackstone hasn’t yet reached “escape velocity” in real estate but emphasized that “it’s feeling better and better” given improving fundamentals around capital costs and supply dynamics.
