Blackstone's Gray: Time to Invest in Retail

NEW YORK CITY-Well aware of the challenges—both macroeconomic and industry-specific—facing the retail sector, the Blackstone Group in recent years nonetheless has invested some $16 billion worldwide to acquire 120 million square feet of shopping center space. Jonathan Gray, the private equity giant’s global head of real estate, explained why Monday at the International Council of Shopping Centers’ New York National Conference: it was the basis that his firm could go in on.

In February 2011, Blackstone won the bidding for Centro Properties Group’s US assets, picking up 588 shopping centers for $9.4 billion. More recently, the firm entered the Turkish market by acquiring Redevco’s shopping center holdings in that country, and acquired Top A Ryde, a Sydney, Australia mall in receivership, for $352 million, less than half its replacement cost. “Distress created a favorable basis in all of these cases,” Gray said in his general-session presentation at the annual conference.

Another factor weighing in favor of investing in retail: supply, or the lack thereof. Gray noted that new construction is expected to add only about one-tenth of 1% to shopping center inventory this year. Then there’s the limited availability of debt confronting shopping center owners, which creates opportunities for firms such as Blackstone.

During his ICSC presentation, Gray sounded similar themes more generally in charting Blackstone’s acquisition strategy during the recovery. He cited the macroeconomic factors that have made the world a scary place for investors since the near-collapse of the capital markets in 2008: sluggish GDP growth, even in emerging markets; high unemployment; curtailed government spending; and the health of the financial institutions at the center of it all.

“When you listen to all that, it makes you want to hide under the covers,” said Gray. “Instead, we went out and invested all this money.”

He also identified the key to Blackstone’s success in real estate. In a word, it’s continuity. “We’ve had the same basic strategy for 20 years,” a time period in which the firm has averaged a 16% net return annually for investors. “We call it: buy it, fix it and sell it,” whether to institutions or on the public markets.

Pursuing such a strategy under current conditions would appear to fly in the face of conventional wisdom, Gray noted. “Fortunately, conventional wisdom is often wrong.” He said that given the opportunity to go in at a low basis on high-quality assets, the shortage of debt and constraints on supply, “why wait?” to invest.