The largest fund administered by Blackstone Group Inc., the giant investment firm known for raising capital from institutions such as pension funds and endowments, is now one that mostly targets individual investors.
Blackstone Real Estate Income Trust, a fund sold in increments as little as $2,500, has raised more than $50 billion since it started five years ago. The firm has used the fund, known as BREIT, to buy rental-apartment buildings, warehouses, office buildings, casinos and other property types.
Like other funds structured as nontraded real-estate investment trusts, BREIT experienced a decline in fundraising in the early months of the Covid-19 pandemic. But by mid-2020, the pace had picked up, and last year BREIT raised an average of more than $2 billion a month, or close to a 70% share of all the money invested in 2021 in nontraded REITs.
“This exceeded even our own lofty expectations,” said Jonathan Gray, Blackstone’s president and chief operating officer.
Warehouses, including one in Northern California, are among the acquisitions made by the Blackstone Real Estate Income Trust.
Photo: Blackstone
BREIT has lured investors partly by paying them an annual yield of 4% to 5%, far more than corporate and government bonds in recent years. Also, BREIT has loaded up on properties that have enjoyed rising values in recent years, such as warehouses and rental apartments, even as the pandemic has raged.
The combination of yield and rising property value produced an average annual return of 15.2% for the three years that ended Dec. 31, according to Robert A. Stanger & Co., an investment-banking firm that tracks the nontraded REIT market.
Blackstone’s ability to maintain such performance in both fundraising and investor return will face new challenges in the coming years. Analysts doubt that residential and industrial property will be able to sustain their recent rate of price increases, especially if rising interest rates make bonds more attractive compared with real estate.
Meanwhile, Blackstone faces new competition in the fundraising world from investment firms hoping to mimic BREIT’s success in tapping into smaller investors. Newcomers to the nontraded REIT business last year included Brookfield Asset Management Inc. and KKR & Co.
“You would think over time the market would spread out,” said Kevin Gannon, Stanger’s chief executive.
Blackstone executives expect the firm to continue to dominate the nontraded REIT business. They say the fund will be able to maintain its strong growth by expanding into new property types such as data centers, storage and student housing.
BREIT last year joined other Blackstone investment vehicles in buying data- center owner QTS Realty Trust in a deal that valued the company at roughly $10 billion. The fund also joined a partnership that last year purchased the real-estate assets of the Las Vegas Cosmopolitan casino and hotel in Las Vegas.
“We’ve expanded what we do in BREIT,” said Mr. Gray, who led Blackstone’s real-estate business until he was promoted to the firm’s president in 2018.
Blackstone executives also expect the BREIT to perform well in an inflationary environment. They point out that properties such as warehouses and rental apartments have leases that are reset every few years, which enable them to keep pace or stay ahead of rising prices.
“If you have a 30-year fixed-rate lease, that is not what you want in an inflationary environment,” said Frank Cohen, chief executive of BREIT.
Nontraded REITs have been around for decades. They fell from favor among investors and financial advisers before Blackstone got involved in the business because they charged high fees and attracted regulatory scrutiny over disclosure issues.
Blackstone addressed these concerns with BREIT, which was structured differently from earlier nontraded REITs. There is more disclosure, and fees are more aligned with fund performance.
“If we don’t generate strong returns, we don’t get paid as much,” Mr. Cohen said.
Write to Peter Grant at [email protected]
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