At 7:15 a.m., David Ebbrell scrambled up a ladder and onto the roof of a warehouse in Germany’s industrial hinterlands. It was pitch-dark, the wind was whipping, and he didn’t care for heights. “It was petrifying,” he says.
Ebbrell’s company, M7 Real Estate Ltd., has sent scouts to hundreds of remote places across Europe and the UK. On that December morning in 2014, Ebbrell was in Korntal-Münchingen, a town of about 20,000 outside Stuttgart. At this battery storage building, he took an old-school approach. He was checking its roof by walking across it—and hoping for the best.
M7 buys and sells an unglamorous and long-neglected kind of property: small urban warehouses. They’re the buildings around auto body shops and junkyards, the ones you might drive past after exiting the highway, places where you’d see a rat or two scurrying at dusk. In London, where M7 is based, warehouses are often referred to, with British understatement, as sheds—as in the kind you might find in your backyard.
Over decades, Ebbrell and his fellow “shed heads” put together reams of binders, complete with photographs—the Encyclopedia Britannica of out-of-the-way warehouses. They cataloged essential facts that couldn’t be found elsewhere: where sheds were situated, who owned them, how much tenants paid in rent and when their leases expired, not to mention their roofs’ structural soundness. M7 staffers later digitized this information, creating a database that made M7 a go-to company in the warehouse business.
Over the past five years, M7 has struck up an unlikely, and lucrative, partnership with one of the biggest names on Wall Street: Blackstone Inc. Some of its executives were with Ebbrell on that cold morning in Germany and have been on many visits since.
Blackstone, like other investment companies, was looking for new, and overlooked, assets. Institutions such as pension funds and endowments invest with private equity firms to find these uncut gems because they’re eager to diversify their portfolios of stocks and bonds. M7’s venture with Blackstone shows the lengths Wall Street will go to find these investments—and the need for fresh data, in this case cobbled together with software and shoe leather, to exploit these opportunities successfully. “Real estate has been quite old-fashioned, conservative and slow to catch up with the use of modern technology,” says Ilkka Tomperi, chief operating officer of CapMan Real Estate, which operates in Scandinavia. “It isn’t traded on a screen.” New information, analyzed by data scientists, allows companies “to make better investment decisions and to get an edge,” says Tomperi, who’s also a professor at Aalto University in Finland.
With M7’s help, Blackstone created a company that became Europe’s largest owner of warehouses, 1,700 across the UK and Europe. Big institutions need to write big checks to make a difference in the performance of their portfolios. “If you like something, don’t just do a little bit of it,” says Kathleen McCarthy, Blackstone’s global co-head of real estate.
But in this case, buying a lot was harder than it sounds. Operating a small warehouse, or buying and selling one, might well be profitable for an individual or a small family business. But could a giant private equity fund buy enough of them, cost-effectively, to improve its returns? In business school speak, could the company do it “at scale”?
Until now, the answer was no. That’s why big real estate investors focused on huge office towers, malls and, when they did own warehouses, the vast distribution centers used by the likes of Amazon.com Inc. It can take just as long and cost just as much to find and vet a property selling for $1 million as it can for one that fetches $100 million. Ask anyone who’s bought a house lately. So for the big shots, small warehouses had been “uninvestable.”
But great fortunes await those who find a way in. “What we had was better data than anybody else,” says Ebbrell, M7’s chief executive officer. “So we could buy a €2 million estate with the same level of efficiency that Blackstone could buy a €500 million office tower. It became a machine.”
Wall Street used a similar approach to invest in small apartments and single-family homes, which had been the province of families and moonlighting would-be entrepreneurs. Using digitized data, investors including Blackstone, Colony Capital and Starwood Capital Group gained an edge on the traditional buyers of single-family and small multifamily rentals. Of course, there are risks to parting with tradition. So-called iBuyers, including Opendoor Technologies Inc. and Zillow Group Inc., used software to rapidly buy and sell residential houses in the US. They ended up with devastating losses. And vacancies are soaring in the shaky office market. Still, warehouses are likely to hold up far better than workplaces emptied-out because of people logging in from home.
For now, Blackstone’s warehouse-buying spree has been a success, particularly for early fund investors who’ve already cashed out of its shed-owning funds. The whole operation certainly achieved scale. The properties span 15 million square meters, almost five times the size of New York’s Central Park. Last year they were valued at €21 billion ($22.5 billion) when investors in Blackstone’s funds were offered a chance to take their winnings or reinvest with the Wall Street company. It was one of Blackstone’s biggest real estate transactions ever, and the largest that didn’t involve the takeover of a publicly traded company. It may well be one of its most profitable.
Ebbrell was born for the warehouse business. He grew up near Birmingham in Britain’s post-industrial West Midlands region. Still in grade school, he worked for a friend’s father who was a real estate investor. He was hooked, mostly because his mentor had access to a company car, a racy Ford Sierra RS Cosworth. Ebbrell signed up for a real estate degree at Nottingham Trent University, a former polytechnic college, the kind that specialized in vocational education and training.
With his open-collared shirts and jaw framed with light stubble, Ebbrell, 47, has a down-to-earth manner. It’s common in the shed trade, which doesn’t traditionally attract the Ivy League/Oxbridge private equity type. He started in the provinces, working as a leasing broker in Prague in the 1990s. There he learned the ins and outs of renting warehouse space for multinationals such as Tesco Plc. The grocer was among the many eager to expand in eastern Europe after the fall of the Berlin Wall.
In 2009, after a series of warehouse-related real estate jobs, Ebbrell joined forces with other shed specialists to form a company. They called it M7 because the seven partners had been drinking at a Munich bar during a real estate conference in October 2008, after the collapse of Lehman Brothers in the global financial crisis. (The “M” stands for Munich.)
They couldn’t work for other companies at the time because of noncompete agreements. Oli Farago, the company’s chief technology officer, began the laborious process of digitizing the thousands of records they’d amassed. “We had six months where we couldn’t talk to anyone else,” Farago says. “There are only so many times you can go to the pub.”
M7 called the software system Coyote. It was an inside joke. In their world, junior hires who do the grunt work of going far and wide photographing warehouses are known as “road runners,” after the bird who outflanked the hapless coyote in the mid-20th century Warner Bros. cartoon. The database let them quickly identify the properties that would be worth buying and rule out those that made no financial sense. In the early 1990s, buyers might have had to examine 100 properties to find one worth an investment. With Coyote, Farago says, it was more like 1 in 20.
Years later, Wall Street caught on to the value of urban warehouses. With the rise of online shopping, they were essential to the often challenging “last mile” of delivery, the one that brings orders to a customer’s door. All that stuff people order on Amazon has to be stored somewhere.
At the same time, developers were buying up industrial property in cities and turning it into luxury apartments. Shed owners were suddenly sitting on gold mines. They could lease their buildings for top dollar to a company that needed them for internet commerce. No one was building more sheds, so they had all the leverage. And even if they couldn’t find a tenant, the owner could find a developer who’d turn the building into pricey condos. (Of course, this same dynamic has led to skyrocketing rents, making life hard for small businesses and renters in London and every other desirable city.) Warehouses were no longer a fringe part of Blackstone’s real estate portfolios; they were the main event.
M7 started traveling in rarefied circles. In March 2016, the company threw a party at a real estate gathering in Cannes on the French Riviera. In a penthouse suite, on the famed boulevard that runs along the waterfront, the M7 hosts drank Champagne with executives in bespoke suits. The suite was filled with boldface Wall Street names: Blackstone, Goldman Sachs Group, KKR and Oaktree Capital Management. The shed heads, who’d grown up quaffing pints at the corner pub, had arrived.
M7’s Coyote system had, in particular, caught the eye of an up-and-comer at Blackstone named Peter Krause. Having just turned 30, he’d been newly appointed to oversee industrial investments for Blackstone and saw the potential in small urban warehouses. At the time, in an unpredictable market with few institutional owners, most urban landlords focused on keeping their buildings occupied, rather than charging the highest possible rent. Krause wanted to buy properties whose leases were due to expire. He was convinced the market rate for rent was much higher. M7’s data, along with Blackstone’s, would let the company outbid others and still make money. It would also enable Blackstone to buy these warehouses quickly and at the scale attractive to institutional investors. “Peter is the mastermind of the whole thing,” says his boss, James Seppala, head of European real estate.
On New Year’s Eve in 2016, Blackstone and M7 hammered out an agreement. M7, with its knowledge and software, would earn fees for buying and managing the properties for Blackstone, as well as bonuses if they increased in value.
Blackstone was ready to bet big. The company had just made a score in warehouses. In 2017 it sold its industrial property company, called Logicor, to China’s sovereign wealth fund for €12.25 billion, in what was then the biggest real estate deal in Europe. Logicor focused on large warehouses. But, in the course of buying them, it also found itself owning small ones.
M7 and Blackstone stood on opposite sides of a cultural divide. Unlike the shed heads, the Blackstone execs tended to have pedigrees. Krause and Seppala had degrees from Harvard University. Krause had two, in fact, one from Harvard Law. He’d joined the company on the Monday after his Friday New York state bar exam.
Back at M7, Ebbrell remembers the moment he knew his world had changed. He’d joined Anthony Myers, Blackstone’s real estate chairman for Europe, on a plane for a warehouse tour. It was commercial, not private, and the destinations were gritty. Ebbrell wore jeans and sneakers. Myers, in his jacket and penny loafers, looked the shed head up and down and said: “Pete said it was casual dress for the tour, but I didn’t realize it was that casual.”
Starting in 2017, Blackstone hoovered up properties for its real estate funds. Its president, Jon Gray, called it the company’s “highest conviction strategy.” Of 220 deals, only 20 were large portfolios; the rest were of a small scale rarely seen on Wall Street. Blackstone once bought a warehouse from a family-owned construction company in Dublin for €1 million, one of the tiniest real estate purchases ever to go before its investment committee.
Blackstone gathered up the 1,700 properties into its own company, which it called Mileway, a reference to that all-important “last mile” of delivery. For example, it owned warehouses where chefs prepare food for Wendy’s and PizzaExpress restaurants.
As Mileway grew, the Blackstone-M7 venture gathered more data, making its investment decisions more efficient. If the managers needed to replace a boiler, for example, or a roof, they didn’t need to haggle; they already knew roughly what it cost. They could commit within days, instead of weeks. One broker who worked on the sale of hundreds of urban warehouses to Blackstone—and requested anonymity to discuss a major client—estimates that a negotiation with the company took as little as a third of the time of other potential buyers. Rivals could be left flat-footed.
In London, one property shows how the business works. It goes by a grand-sounding name, Parkfield Industrial Estate. But it wasn’t much to look at when Ebbrell first inspected it with a team from Blackstone in 2017. It was a collection of low-slung brick buildings, their roofs packed with asbestos, near yards piled with scaffolding.
But the location was ideal. Wedged between two railroad tracks in London’s Battersea district, south of the Thames, it’s only 3 miles from Big Ben, the clock tower in the heart of London, within sight of office towers. Today, Parkfield’s newest warehouses have spotless gray steel walls and a blue roof, along with LED lighting and an environmentally friendly boiler. Think of an iPhone turned into an industrial space.
The Caffè Nero chain keeps sacks of Brazilian coffee beans inside. It also roasts them, the sweet aroma wafting from an open door. The chain is so committed to the site that it’s invested in special trucks small enough to squeeze beneath the low-slung rail bridge that marks the estate’s entrance. Five years ago, rents hovered just above £10 ($12.45) a square foot at Parkfield. Blackstone is now asking more than £35.
By 2022, five years after Blackstone started to invest in urban warehouses, it was time for its original funds—primarily its fifth and sixth European offerings and its eighth global fund—to cash out of Mileway. The company declined to comment on financial details. Publicly available records suggest that Blackstone bought the warehouses for an estimated €16 billion. Filings show that the company typically finances 65% of its real estate purchases with debt. If so, the funds would have invested €5.6 billion. Blackstone has said it sold the properties for €21 billion. That would indicate a gain of €5 billion after repaying about €10.4 billion in debt. In other words, investors who cashed out may have almost doubled their money in only five years.
The deal’s actual profit is likely to be lower, based on crucial facts, which aren’t known, such as how much Mileway paid for capital improvements. But data from real estate research firm Green Street show that doubling investors’ money was more than possible. Rents in major markets, such as London, have jumped at least that much since Blackstone started buying, as have the prices investors are willing to pay, relative to a property’s rent. Even though the market has cooled over the past year, “it has been an exceptional trade for Blackstone,” says Green Street analyst Peter Papadakos.
M7 got a windfall, too, because Blackstone had brought its operations in-house two years before and paid its partners tens of millions of dollars, according to people familiar with the arrangement. As manager of the funds, Blackstone would likely have reaped even more on the sale of Mileway. The companies declined to comment on the payments.
The game isn’t over. Blackstone essentially sold the property to other funds it controls. Many institutions chose to reinvest in those vehicles. In effect, Blackstone still has an open bet on the Mileway warehouses.
Those who’ve already taken their money out can be assured of one thing. The original funds announced the sale on Feb. 15, 2022, nine days before Russia invaded Ukraine, triggering a global property downturn. In real estate, of course, two things are key: location and timing. Those who cashed out then certainly had both.
This article was provided by Bloomberg News.