Blackstone Group Inc. President Jon Gray has some advice for investors looking to make sense of the wild real estate market in the U.S: Don’t fear a bust anytime soon.
Home prices have surged the most since 2005, cheap mortgages are encouraging buyers toward new homes, and building costs are spiking because of rising prices for raw materials. At the same time, a worker shortage means new construction is failing to keep up with soaring demand. And in commercial real estate, the wider acceptance of remote work during the Covid-19 pandemic is threatening to decimate office properties.
In spite of all that, now’s a pretty good time for the market, according to Gray, who has been at the center of the biggest booms and busts in the industry over the past three decades.
The market isn’t showing the typical warning signs—too much leverage, too much capital, too much building, Gray said in the inaugural episode of “Bloomberg Wealth with David Rubenstein.” There will be a “rediscovery” of cities such as New York and San Francisco, fueled by immigrants, creativity, entrepreneurship and technology, he said.
The billionaire also spoke about where he’d put $100,000 today, what to avoid pouring money into, the best way to invest in real estate and how President Joe Biden’s tax policies could affect property owners.
Gray’s journey at the New York-based firm began in 1992, working on M&A pitch books and ordering dinner for associates at the fledgling private equity shop. About a year later, the real estate market collapsed. Sensing an opportunity, Blackstone founders Steve Schwarzman and Pete Petersen formed a real estate business and tapped Gray, a recent University of Pennsylvania graduate who had once considered a career in journalism, to help get it off the ground.
By 2005, Gray was running the unit and spent the next 13 years building it into a behemoth with about $115 billion of assets. In 2007, he took the Hilton hotel group private, and then had to restructure the deal during the financial crisis, ultimately more than tripling the investment when Blackstone exited 11 years later.
“Be a high-conviction investor,” Gray, 51, told Rubenstein, the co-founder of Carlyle Group.
The interview has been edited and condensed.
The economy has been pretty good, but it probably will head down at some point, so if I want to invest in real estate, is now a good time?
It’s still a pretty good time for real estate for a couple of reasons. The warning signs are twofold—too much leverage, too much capital—and we don’t really have that in the real estate system today. The other is too many cranes and too much building, and we’re actually below historic levels in terms of new supply.
The other thing I’d point out is that the S&P 500 delivered something like four-times the return of public REITs since the beginning of 2020, before Covid. So real estate is lagging coming out of the recovery because obviously people have been concerned about the physical world. As the economy reopens, people go back into spaces, real estate is gonna see a little bit of a bounce. I think the risk is if interest rates move a lot.
One positive thing about real estate also is inflation drives up the replacement cost of buildings. And that gives you a little bit of a cushion on existing real estate.
Is residential less risky or more risky than commercial real estate?
If you talk about for-sale, single-family housing, there’s probably more risk, in the sense that you’re building something and you’re selling it, and it’s a function of the market. If you’re talking about rental housing—an apartment complex—that tends to be less risky because it’s less cyclical. People don’t give up their apartments. There’s some volatility but nothing like, say, office buildings or hotels.
And then commercial real estate involves office buildings; warehouses, which has been the biggest theme for us over the last 10 years; hotels; shopping centers; senior living facilities. And all of them have different risk-returns, depending on geography.
New York City has seen a lot of people leave during Covid. Do you expect that people will come back, work five days a week, and use all the office space in New York or similar cities that they did before?
There is sort of a recency bias—that because we’ve been home, we assume that’s the way it’ll be. When we think about our company, we know we’re better together. We’re better at being creative, we’re better solving problems, we’re better training our young people. It’s really an apprenticeship business, learning how to invest. We have a lot of smart, talented people who are connected by culture. Being together matters.
Yes, some companies will conclude they don’t need quite as much space, so that’ll create some additional vacancy. People will be concerned about owning office buildings, and that may create an opportunity. There will be some headwinds for a number of years and then, over time, things will recover.
I would point out, though, outside the U.S.—for instance, in China—buildings are back to full capacity, and in Europe people don’t have as much space in their home lives. So not all geographies are the same. And even here, I think there’ll be a bias toward going back to the office, even though it won’t be like it was before, in full.