Blackstone's Jon Gray Recurring Bottom Calls

Caveat: his statements are easy to misunderstand.

Blackstone President Jon Gray is being quoted in an interview with Goldman Sachs as saying the commercial real estate market is reaching its bottom.

That may sound familiar. In the company’s January 2024 earnings call, Gray said, “[We] believe values in commercial real estate are bottoming. This doesn’t mean there won’t be more troubled real estate investments to come in the market, particularly in the office sector, which were set up during a period when borrowing costs were much lower nor does it mean we won’t see a slowing in fundamentals in certain sectors with excess near-term supply.”

In March 2024, during an interview with Bloomberg, Gray said, “The perception is so negative and yet the value decline has occurred, so when you get into this bottoming period that’s when you want to move.” He then added, “As investors, sometimes, one of the risks is that you miss it by being overly cautious and I think now is probably a good time before rates come down.”

It would be a half year before rates came down.

In the Goldman Sachs interview, Gray gave some insight when discussing the Hilton Hotels acquisition, which happened at the peak of valuations, when, with investment partners including Goldman Sachs, “we went all in, in absolutely the wrong moment.” They ended up “highly levered with EBITDA, cash flow down 40 percent,” and ultimately wrote the investment down by almost three-quarters on an unrealized basis.

“So, despite all the negativity out there, we stuck with it as a firm,” he said. “We ended up putting in $800 million.” And then things started to turn around, ultimately making $14 billion for investors. The businesses were good and “we invested in a great neighborhood, global travel, and a great business model, this sort of franchise, management, capital-light business,” Gray noted.

Put this together, and you see that Gray doesn’t want to miss valid opportunities, has experienced terrible timing, and knows the need to properly evaluate a business (which any piece of CRE property is) and its ongoing competent operation.

“And so, it made me think, how can I find other things like that?” Gray said. “Single-family housing after the financial crisis. Global logistics with the movement of e-commerce. Today, things like data centers and power,” he said.

“Certain areas geographically around the world. India. All these things. And, you start to say the model matters and the 60-page memo matters, but maybe that first paragraph, what is the sector I’m deploying capital in and the underlying business … maybe I should focus a lot more on that. Now, it doesn’t mean you can pay any price, we saw that in 2021, for a good business. But there is no question that investing in better neighborhoods, your chance of success goes way up.”

He did say that Blackstone sees some slowing in the economy, and more muted hiring, but much of that was due to central bank restrictions to slow inflation. Although an absolute bottom is yet to be seen, there’s been enough movement that it makes sense to invest, especially in data centers, power and energy, energy transmission, services that utilities need, and life sciences.