Analysis: Blackstone bets big on industrial property rebound
NEW YORK (Reuters) - Blackstone Group LP (BX.N) is making a $2 billion bet on one of the hardest hit areas of commercial real estate, buying properties and assembling a management team in a sign that it might take its warehouse business public.
The latest real estate wager by the owner of Hilton Hotels is on warehouse and distribution centers, an unglamorous corner of the property market known by an equally dull name: "industrial real estate."
In six months, the private equity firm's real estate arm, Blackstone Real Estate Advisors, has amassed a portfolio of 275 industrial properties, spanning about 45 million square feet.
It might more than triple its holdings to about 150 million square feet, according to an industry source with knowledge of the plans, but who is not authorized to talk about them.
These warehouses and distribution facilities -- sometimes as large as 17 U.S. football fields -- sit beside highways, near airports and shipping ports throughout the United States. The hulking concrete shells are stuffed with televisions, shampoo, soft drinks and other goods headed for stores. Tenants include shippers, manufacturers and retailers.
"Industrial real estate in the private market has been cheaper than other property sectors," said Green Street Advisors analyst Steven Frankel. "Industrial last year had not recovered at nearly that same pace as apartments, or hotels or the majority of other sectors. Pricing looked very attractive on a relative basis."
Blackstone's Real Estate Advisors group has about $24.3 billion under management. In 2007, it completed the largest U.S. commercial real estate deal in history, buying Equity Office Properties for about $37.7 billion. Today it is the world's largest hotel owner, with Hilton and other brands.
Recently, Blackstone Real Estate Advisors hired Tim Beaudin, a manager with experience in public companies, to build the industrial real estate business.
That has some wondering if it will become Blackstone Real Estate Advisors' first initial public offering.
"It wouldn't be surprising to see a public exit for an industrial vehicle," Frankel said. "By having somebody that has been in the public market and has navigated public disclosure, dealing with analysts and with a variety of other avenues makes the process a lot easier."
Blackstone declined to comment.
Beaudin, who takes the helm in March, did not return calls seeking comment. He is president and chief operating officer of Apartment Investment and Management Co (AIV.N). He also worked at a San Francisco real estate investment trust called Catellus that was bought by ProLogis.
In November, Blackstone bought 180 properties, totaling 23 million square feet, from ProLogis (PLD.N) for $1.01 billion. Earlier in the year, it paid $900 million for industrial real estate from Eaton Vance. It also paid $191 million in December for real estate from Exeter Property Group.
Blackstone's industrial property portfolio is larger than that of EastGroup Properties Inc (EGP.N), and is closing in on First Industrial Realty Trust Inc (FR.N).
Many investors have shunned industrial real estate, especially as the business has suffered from weak consumer demand as unemployment remains high and wages stagnate.
Although the availability rate, which is the vacancy rate plus what is expected to become vacant over the next year, peaked in the second quarter of 2010 at a record 14.6 percent, it drifted down to 14.3 percent in the fourth quarter, according to CBRE Econometric Advisors. This suggests that the market for industrial real estate may improve soon.
Only 17 million square feet of new space was built last year, compared with 109 million in 2003 during the last downturn. In the fourth quarter of 2010, only 3 million square feet came to market. That means the supply would be low if demand increased, pointing toward a sharp recovery.
"That's equal to three large buildings," said CBRE Econometric Advisors economist Luciana Suran.
Two investment bankers, who are not authorized to discuss the business publicly, said they do not expect Blackstone to take its industrial holdings public this year, and that Hilton might go public first.
It might be smart to wait. Private equity firm The Carlyle Group CYL.UL in September brought Coresite Realty Corp (COR.N), whose buildings house data centers. Its IPO failed to thrill investors, and the stock trades below its IPO price.
(Editing by Robert MacMillan)