Private equity giant Blackstone posted a nearly 50 percent jump in a closely watched profit measure, buoyed by sales of its investments as interest rates ease and dealmaking picks up.
The New York-based firm, the world’s largest commercial property owner, signaled optimism for commercial real estate, declaring the industry is approaching an inflection point in its recovery.
Blackstone’s distributable earnings — profit that can be paid out to investors — rose 48% to $1.9 billion in the third quarter, driven partly by both sales of investments or initial public offerings. For instance, Blackstone-backed Legence, a provider of engineering, installation and maintenance services for building systems, went public in September. Among other planned exits, Blackstone also is selling Manhattan’s Park Avenue Tower to SL Green Realty, Manhattan’s largest office landlord, for $730 million.
“The deal dam is breaking,” Jon Gray, Blackstone’s president and operating chief, said Thursday on its third-quarter earnings conference call. He added that Blackstone should sell more investments or see more of its backed companies taken public as the mergers and initial public offering markets pick up. It’s a “directionally healthy and more liquid market,” he said.
The Federal Reserve reduced the benchmark interest rate in September, its first rate cut this year, with economists expecting two more cuts coming before January. Higher borrowing costs since the Fed rate hike in 2022 have hurt deal flows and led to increased foreclosures, studies have found.
The “declining cost of capital” is a “secular tailwind,” Blackstone Chief Executive Stephen Schwarzman said on the call. “More conducive capital markets should deliver greater returns.”
Blackstone is in the “early innings of penetrating markets of enormous potential” as it expands in areas including artificial intelligence-driven demand for data centers and energy, Schwarzman said. Blackstone is also “rapidly expanding its universe of investors.”
Seeking more investors
The company recently unveiled its first TV ad in Japan, a country with one of the highest savings rates in the world, to attract private wealth investor capital. Blackstone, celebrating its 40th anniversary this month, also is readying itself amid expectations that 401(k)s and other retirement plans could eventually have access to alternative asset investments.
Blackstone’s assets under management rose to a record high of $1.24 trillion after investor capital inflows grew 12% to $54.2 billion, the fourth straight quarter where money coming in topped $50 billion.
As to the real estate sector, Gray said the industry has reached a “steeper point in that recovery curve” after having reached a bottom in December 2023 and early 2024. For example, its flagship income-producing Blackstone Real Estate Income Trust posted three straight quarters of positive performance, with investor share redemptions reaching the lowest level in three and a half years, Gray said.
Meanwhile, the decline in new construction in U.S. warehouses and apartment buildings, among property types where Blackstone has invested heavily, “should be very positive for value over time,” he said.
“A number of tumblers are falling in place for real estate,” Gray said, adding the industrywide volume raised in the commercial mortgage-backed securities market also has picked up 25% so far this year in light of the cost of capital coming down. “Qualitatively we are seeing good signs. … We are … getting closer to that real estate inflection. We try to deploy capital at scale before people become more comfortable.”
Analysts on the call raised questions about a potential data center bubble and if investors should be worried about Blackstone’s private credit business in light of JPMorgan Chase CEO Jamie Dimon’s recent warning about broader risks in the corporate lending market.
Lending concern, data center demand
Dimon suggested lending standards have become too loose, ultimately leading to the bankruptcies of auto parts maker First Brands and subprime auto lender Tricolor. “When you see one cockroach, there are probably more,” Dimon said on the bank’s recent earnings call. “Everyone should be forewarned on this one.”
Gray said some bank-originated credit bankruptcies and reporting fraud have nothing to do with the private credit business that Blackstone is involved in, adding Blackstone has a “minimal” default rate. “We don’t see a lot of credit issues out there given the underlying strength of the economy,” he said.
However, with rates coming down, he said that does impact yields in the Blackstone Private Credit Fund even though he said investors are still getting a "relative premium over" what they "can get in liquid credit."
The fund offers senior secured loans to large, performing companies in historically resilient sectors, according to Blackstone’s website.
Addressing a potential data center bubble, Gray said Blackstone shields itself from any such risk by having “investment grade counterparts” in “long-term leases” of 15 to 20 years.
With strong AI-driven demand for computing, “this is a very good sector to be in,” Gray said, adding Blackstone’s data center leasing pipeline doubled globally from the second quarter.