Facing economic challenges that include inflation, currency issues, and other headwinds, commercial real estate companies should focus more on cash flow assets as a method to drive revenue growth, Kathleen McCarthy, global co-head of Blackstone Real Estate, said during a general session at the ULI Fall Meeting in Dallas.
In this current environment, “I think where investors need to focus, is how to generate cash flow growth,” she said.
“Where we focus on is where can we be in asset classes where the wind is at our backs, and where things that are happening in the broader world are driving demand for assets, where the supply fundamentals allow for us to continue to propel cash flow growth. We’re also focused on trying to be in assets that have shorter-duration leases.
As it relates to Blackstone, “we have been working towards a portfolio that would perform in this environment for quite some time, going back to 2015, 2016 we started to think with a great deal of clarity and focus around how we would construct a portfolio around an environment that would have higher cap rates potentially, or higher interest rates, it felt a little bit too good to be true, and we may be a bit early, but starting then is why we have a portfolio that is 80 percent concentrated in warehouses, rental housing, hotels and lab office space.”
The world’s largest owner of commercial real estate with $577 billion in assets over 37 countries, McCarthy said that today, inflation is high and has been persistently high for two years.
Today, 80 percent of its portfolio covers multifamily, warehouses, life science offices, and hospitality.
“There’s a ton of noise, one of the skills we’ve developed is trying to quiet noise and say, ‘Let’s focus on what we know from the real estate we have and what it’s telling us,’” she said.
Policymakers Should Focus More on Housing
McCarthy said all eyes on policymakers should devote more attention to housing—the lack of supply, the lack of affordability, and high demand.
“Thinking about all of the NIMBYism, what are the ways, from a federal level or even a state level, that you can reward communities that are pro development, particularly, pro transit-oriented development, pro affordable development and maybe on the flip side penalize those who don’t,” she said.
McCarthy encouraged members to converse with their governments about what they are seeing in this space.
Blackstone’s Primary Sectors
McCarthy also broke down how Blackstone sees its primary asset classes and current industry trends.
Industrial. E-commerce continues its growth trend. Companies are looking more at offshoring and how to better handle supply chain issues. Retail, with its high inventories, has created greater demand for warehouse space.
She said the national warehouses vacancy rate is around 2.9 percent and given that new development costs are so high—they are up by about 100 percent over the past two years—there’s just not a lot of new supply coming.
Hospitality. Blackstone, admittedly, is more bullish on this sector than many, McCarthy said.
“It remains a high-conviction for us,” she said. “There is a 30+ year trend line that goes up and to the right in terms of demand for travel…we continue to be really enthusiastic. Our portfolio in hospitality is really concentered in super-special assets in super-supply-constrained locations, largely beachfront assets and the other part of our portfolio is at a more affordable price point.
At the same time, Blackstone has invested in less-expensive hospitality assets such as Great Wolf Lodges.
Life sciences. It used to be that everyone’s goal was to own a Class A shopping mall, according to session moderator Adam Weers, COO of Trammel Crow. Since the pandemic, everything has changed. A revolution has taken over life sciences. Now, it’s not just all about pharmaceuticals,
McCarthy said that life sciences used to be run out of almost ‘secretive’ campuses, “but it moved more open source, all the best researchers wanted to be in these pulsing hearts of research centers in Cambridge, [Massachusetts], Cambridge [in the U.K.], where they could work alongside universities and one another to propel that research.”
Women in leadership. “I think our team and our industry, should reflect the whole population, and so from a gender standpoint, 50 percent of professionals at all levels are women, at least,” she said.
Blackstone recently has doubled the number of managing directors and senior managing directors who are women.
“When looking to ‘get better,’ companies should, from my perspective do three things. One is to recognize that women have different things floating around in their heads, getting put into their heads, concerns, questions than generally their male colleagues do,” she said.
“Two, I would say, get in direct conversation with women about what they want to be doing, and what they are willing to take on in their careers. And three, is normalize the conversation around the struggle and juggle that is real.
“The idea of normalizing of conversation to be an A+ at work an A+ at home. I have the benefit of working with an incredible group of men who are all doing what I am trying to do, which is, be excellent at work and be really present for their family and in particular their children. I think for whatever reason, socially, men don’t talk about the fact that they are leaving to go home for dinner. I think we have to normalize that, because the more guys say it the more women feel more comfortable.”