Private Equity Likes the Look of Blackstone’s Real Estate Model

(Bloomberg Businessweek) -- In January the 800 Fifth tower in Seattle was sold for $540 million—the biggest commercial real estate transaction in the Northwest in three years. The buyer isn’t a typical developer, but investment firm Blackstone, a longtime leader in private equity. The company also recently bought five office blocks and a mall for $1.3 billion in Shanghai. Last fall, Blackstone and a partner bought thousands of railroad arches in England, many of which have been converted into retail spaces, for $1.9 billion.

With everything from hotels to office buildings to single-family homes, Blackstone Group LP—much better known for leveraged buyouts and its chief executive officer’s taste for lavish birthday parties—is now the world’s largest landlord.  Its portfolio, at $136 billion, is bigger than the market value of the largest real estate investment trust in the S&P 500.

It’s also the cornerstone of what’s known as the Blackstone model. Real estate has more deal flow and liquidity than buyouts, so it’s helped the company get big and diversified. Blackstone, which is publicly traded, has a market value of $41 billion, double that of its closest rival, KKR & Co. And Blackstone trades at 13.3 times this year’s earnings, vs. multiples of 9 and 10 for Carlyle Group LP and Apollo Global Management LLC, respectively.

Perhaps that’s why other PE powerhouses are eager to get into real estate. Carlyle last year closed on a $5.5 billion fund that will expand its real estate business by 50 percent. In October, a KKR-led group paid $1.9 billion for a property in Seoul that will eventually include offices, shops, and a 263-room five-star hotel. Private equity companies as a group have more than $900 billion in real estate investments, according to Preqin.

Can this model be replicated? Blackstone’s is partly a right-place, right-time story. The value of its property business more than doubled in 2007 with the $39 billion acquisition of Sam Zell’s Equity Office Properties. The company had enough time to flip properties at the peak—and enough resources to pick up a list of buildings in the wake of the financial crisis.

Blackstone, like other PE companies, has also benefited from a multidecade period of falling interest rates. Low rates tend to raise the value of assets such as property. The U.S. Federal Reserve’s recent dovish turn is a reminder that rates can stay low for a lot longer than market pundits expect. Still, it’s fair to worry that in the long run money might not be as easy as it has been.

Another risk for Blackstone and its rivals may be PE’s ever-growing shadow. People have noticed that they’re both big employers—KKR’s portfolio companies have almost 1 million workers—and giant landlords. Last year, KKR and others were pressured by Senator Elizabeth Warren to create a fund for workers fired when retailer Toys “R” Us went bankrupt. If the market turns down, lawmakers may want to give Big PE some of the same regulatory scrutiny big banks deal with. But at least for now it appears the scaffolding of the Blackstone model is on its way up. —Gandel is a finance columnist for Bloomberg Opinion.

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