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Blackstone’s Bet On Office Space Pays Off

Blackstone’s Bet On Office Space Pays Off
By: Martin Blanc
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The Blackstone Group L.P. (BX) announced yesterday it had struck a deal to sell five office buildings in Boston to an investor consortium led by Oxford Properties Group. Under the agreement, Blackstone will sell the real estate assets, encompassing around 3.3 million square feet of office space in downtown Boston, for aabout $2.1 billion. The latest deal would be the investment firm’s largest sale of office properties since the financial crisis.

Blackstone said that two of the buildings will be sold to the Toronto-based real estate company Oxford Properties, while the other three properties would be sold to a partnership set up between JPMorgan Chase & Co. (JPM) and Oxford. A sixth waterfront property, Rowes Wharf, will also be sold to its existing co-owner Morgan Stanley (MS) for $200 million.

Shares of Blackstone are up 1.1% in the first two hours of trading today, following the announcement of the sale.

Oxford Properties Group is owned by the Canadian pension fund Ontario Municipal Employees Retirement System (OMERS), which manages close to $20 billion in assets across the US, UK, and Canada. Other buyers who had been in the running for the office towers in Boston include MetLife Inc. (MET) and Norway’s Norges Bank, as well as Singapore’s sovereign wealth fund.

Blackstone had acquired the Boston office properties along with many others through its $39 billion leveraged buyout of Equity Office Properties Trust in 2007, at the height of the property bubble. The company had then battled it out with Steven Roth’s Vornado Realty Trust (VNO) to acquire Equity Office Properties from real estate mogul Samuel Zell.

Blackstone‘s Office Portfolio

As the property market collapsed right after the deal to acquire Equity Office Properties, Blackstone managed to sell off some of the real estate trust’s properties before the housing crash, including a number of prized skyscrapers in New York City. But as property values tumbled in 2008, Blackstone held on to several real estate assets to ride out the storm, betting that their value would eventually rise.

The bet has certainly paid off well in recent times; office values in the US have risen over 6% in the last one year, as unemployment drops and low construction activity drives a mismatch in demand and supply. Moreover, office prices in business districts of major US cities have risen around 25% over the last year, and Blackstone is booking gains on the bets it placed just before the downturn.

Blackstone has taken a different approach with office properties, preferring to negotiate individual sales rather than group them together as a brand, which works well for hospitality assets. The company has so far kept substantial stakes in its hotel brands such as Hilton Worldwide Holdings Inc. (HLT), Extended Stay America Inc. (STAY), and La Quinta Hotels Holdings Inc. (LQ), despite having recently spun off the hotel groups through initial public offerings. In an investor call last year, Blackstone’s President Hamilton James said: “If it's a hotel chain, it's going to be a business. If it's a collection of offices, it probably is more apt to be either individual properties or properties lumped regionally or locally, or by type.”

More recently, Blackstone’s real estate arm, headed by Jonathan Gray, has been very active in both buying and selling prime office properties. The company is now looking to take advantage of rich premiums, improving macro conditions, and an influx of foreign buyers. In 2013, the investment firm sold off more than $9 billion in office properties, up from $1.8 billion in 2012.

In January, Blackstone sold the 1-3 Center Plaza office building located opposite Boston City Hall to Shorenstein Properties for $307 million. Other recent sales in the Boston area include the Wellesley Office Park, New England Executive Park, 25 Mall Road, and Riverside Center, among others, which netted the firm with over $1 billion this year from Boston alone.

The company is keen on continuing its run as a major player in the real estate market. Blackstone is already the nation’s largest owner of single family homes, and has also diversified its holdings to enter the realm of casinos, seen in its $1.7 billion acquisition of The Cosmopolitan resort in Las Vegas last week.

Selling at the top makes sense for Blackstone; the value of its $10.9 billion real estate fund Blackstone Real Estate Partners VI, launched in 2007, is now close to $22 billion. As the commercial real estate business benefits from a spur in economic activity and more demand for office space, expect Blackstone to stay ahead of the game in acquiring prized real estate and surge forward with more deals.

What do you think about our views on Blackstone? Leave your thoughts in the comments section below, and an analyst will reply to you shortly.

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