How Blackstone Real Estate's Thematic Approach Informs Its Investments In Bio-Tech Buildings & More

so tyler thank you so much for joining where are you zooming in from today i am in new york and i am back in the office um and i based on your screen it looks like you're in a better spot than i am i see the trees in the background so you must be in park city yeah i'm still out here um i've been i've i've been here now uh i guess eight months since the beginning of covet so it's it's starting to feel like home um but we'll talk more about that in the new the new demographic reshuffling that's happening in a bit but can you maybe just start by giving people uh like a bit of your background what your role is at blackstone and more about blackstone it's real estate business sure so i've been with blackstone for almost 17 years i joined as an analyst i've done a little bit of everything but spent the entirety of my time working within our equity business within the real estate team today i um i lead our acquisition effort in the americas so essentially uh my team helps identify new investment opportunities for all three of our equity oriented strategies which is our opportunity fund business our core plus business and our private reads so we have um really one investment team that focuses on all of those strategies and um each with a very distinguished risk and return orientation and um you know never thought i'd be at blackstone for as long as i have been um you know you you and i overlapped for a brief period of time before you went on to bigger and better things but um i'm still here and still having fun yeah it's it's awesome to see just obviously how blackstone has grown it was i guess 12 years ago that i was uh i was working for you and everyone at blackstone it's like it just continued this this enormous growth which is awesome to see and that actually kind of uh leads me to ask my next question which is in some ways one of the most inspiring deals for when we started fifth wall was when we saw what blackstone did with bts right so we were like wow this massive you know financial powerhouse that is all this real estate distribution is investing in this emerging real estate prop tech company and how transformative can that be for their business and to some extent that was the spark behind what ultimately became fifth wall but i'd love to hear how you at blackstone real estate think about technology as being core both to your operations but also core to like your future capital allocation and your strategy as a business sure listen i think every business has to be really honest with themselves about what you do and um there are very few businesses that are good at doing everything um at our core what we're trying to do within the real estate business is be the best real estate investor and asset manager on behalf of our lps as we can be but i think probably seven or eight years ago it started to become increasingly apparent that while real estate was reacting and evolving to technology slower than a lot of the rest of the world it would not be immune and i felt as well as some of my other partners felt that it was really important for us even in our core business our core business of investing in real estate and managing real estate that we needed to be more in tune with what was happening in terms of emerging technologies that could impact real estate and it could be traditional type real estate platforms or offerings that were just shifting consumer behavior or impacting some of the traditional real estate asset classes but it was it was our belief that we could not be successful long term if we didn't have a better finger on the pulse for what those trends were and how those technologies may impact which asset classes or geographies that we want to invest in and i'm sure we'll jump into it but our um you know even our allocation of capital to traditional real estate sectors is very heavily informed by uh evolving trends in technology and uh therefore evolving uh uh shifts in demographics and a lot of what we're really trying to do is just get in front of those uh tailwinds and get out of the way of certain headwinds that are negatively or positively impacting different real estate sectors or geographies and i think when you really peel back the layer our bullishness or bearishness on most asset classes can be explained through a lens of technology and so our investment in vts which was small and not core to our overall business was really born out of a belief that we needed to have a better finger on the pulse as to how our core business was evolving and how technology was impacting it so that we could be as good of an investor as we strive to be yeah and i think the way it sounds like you're looking at it is this kind of holistic view of like when people think of technology as colliding with the real estate industry oftentimes their minds just go to like proptech and they're like obvious many examples of prop tech companies that have been very successful but the way i think about technology that sounds like the way blackstone does is kind of like there is technology that makes the business of buying and operating real estate better easier faster more efficient and that is like crop tech then there's technology that actually in its application can kind of reimagine a particular business model in real estate right so those are kind of like the airbnbs the co-workings the co-livings where it's not really pure technology but it's technology-enabled business model transformation and then the third largest is how are like macro secular trends in the technology industry impacting the relative demand for real estate and i know that in that last category as blackstone obviously has you know been very influential in industrial real estate in the us that to me feels like a category almost for whom e-commerce disruption of retail has been existential right it is it is an explainer it is a it is the driver that is driven so much of industrial growth how did you think about when you were making your various investments the industrial sector how much did like technology analysis and macro trends around e-commerce inform that initially very little so in 2011 um there was a lot of disruption and dislocation in all real estate asset classes and we saw an opportunity to buy industrial assets at what we thought were just historically cheap valuations but as we started to see what was happening to rental rate growth we started to notice that rents were growing faster than gdp and for a long time industrial rents pretty much grew exactly in line with gdp so we really started to dig into that and trying to understand what was happening um it was from a secular standpoint above and beyond just sort of um a you know an improving economy that could explain why rents were really growing well in excess of gdp and as we dug into it we started to understand and learn a little bit more about supply chains and learn about what it means to buy a package online versus to buy that same good in a store and what you learn is that that package you buy online has to be repositioned multiple times more than it would need to be if it was just bought in a traditional brick and mortar retail store and the simple takeaway from that is that one good bought online requires more logistic space than if it was bought through a traditional retail channel and i think that really grabbed our attention and it took something that was initially a a real estate thesis and and uh sort of focused our attention on what could be a technology-driven tailwind that today seems sort of self-evident like i don't think anybody's winning any awards for saying today that you know industrial is is supported by technology but in 2011 and 12 when we first started noticing this um we really got very aggressive in buying industrial first in the u.s and then elsewhere around the world and we really started to study closer and closer how the supply chain in and around e-commerce was evolving and so while our first acquisitions were kind of indiscriminate in the industrial space today we've gotten much more focused in terms of last mile facilities some of which are older but are more infill maybe they might be smaller but it's the type of real estate that is exactly one step ahead of where various e-commerce users want to be whether it be geographically speaking or uh or from a physical standpoint and from our standpoint you know that that this trend of consumers buying online is not slowing down covet has dramatically accelerated it i think online sales are up something like 60 and we're seeing um in every way those tailwinds translate into rental rate increases and asset value appreciation for industrial assets and um i i think it's 100 a technology oriented oriented uh and driven real estate thesis that um we have been uh extremely bullish on for a long time i think globally we've bought in excess of a billion square feet of industrial and logistics space in the last 10 years and um and we continue to be fairly constructive in terms of the fundamentals and how e-commerce will continue to drive those it's a really interesting insight what you just mentioned that you know for a given good sold you use the word the amount of times that good needs to be repositioned which which i think in in the way you're defining means like the number of times that good has to flow through physical space to affect the same outcome right so let's just take a toothbrush that someone's buying in a cvs the amount of physical space consumed by that toothbrush getting to that store so that that consumer can buy it and affect that sale versus someone buying it on amazon it's much larger because it's happening across all these this massive logistics network right it's going through multiple sorting facilities and distribution facilities to to actually get to the customer and i'm curious how that intersects with like this kind of orthogonal philosophy i have which is like at the same time that you know certain kinds of like commercial activity are requiring more space the importance of the location of that space is kind of diminishing meaning like in retail it's like location location locations you're only going to drive a short distance to your pharmacy but the even though it's consuming more space than the purchase of that same toothbrush location still matters but it's more regionally important right it's it's more it's it's more diffuse it's not as specific to a given location do you think that's a driver here as well that like picking these big important regions is equally important now and equally informed by technology assumptions well i think what you're getting at is something i call space arbitrage so um you know traditional thinking was you would think about real estate asset classes in and of themselves that retail was separate and distinct from industrial and industrial was separate industry distinct from office and i think increasingly users think about space a little more fluid and they're looking for arbitrages to exploit given the different cost of those different spaces and increasingly you can accomplish similar utilities out of um you know the same spaces across different um asset classes and so in a lot of ways industrial space today is just modern retail space it's where goods are being bought and sold through um but if you want to buy something online from louis vuitton does that retailer need to have space rented on fifth avenue for four thousand dollars a foot or do they just need a really great warehouse in the bronx that they can deliver uh you know same day to the consumer for um at a lower cost you know per foot obviously they have delivery costs they've got to take into account but um you know traditional thinking was that you thought about each individual real estate asset class in and of itself and you thought about the utility of what that asset class did and who it serviced kind of within the confounds of just that asset class and i think what you're seeing um with industrial is a lot of um of the flow of retail goods is moving out of traditional bricks and mortars and it's moving into a different supply chain which is industrial um but it's it's kind of the same utility goods goods moving from um you know producer to the consumer it's just moving in a different format and i i think trying to you know be honest with yourself about how those shifts are are taking place and getting in front of them um or or equally out of out of the way of of if you're on the wrong side of those trends is is important and uh i think that's kind of what you were hitting on yeah it's like it feels like so many asset classes the hard lines between them have become like pretty blurry like i think about the concept of like ghost kitchens right these kind of kitchens that do not have a physical location like there's nowhere you can go and actually dine in at the restaurant but what they are monetizing is this massive growth in on-demand food delivery and so it's it's kind of like you've abstracted the concept of food production and a restaurant so there's a restaurant that you can order from an uber eats that you can't go to but it comes right to you and that kind of blurs the line because between retail and industrial because a restaurant's a factory it's making food it's making finished products for you but it's also a retail store in the way we typically think about it but a ghost kitchen is really just the factory with a distribution network that's ubereats and what i would say is you know anyone that's been a real estate investor knows the term replacement cost which is you know the idea of what would it cost to replicate the exact asset you're buying new and that's still relevant but i would also encourage people to focus on replacement utility because if the utility can be replaced um without necessarily rebuilding that same physical space it's worth being mindful of or if it can be um if that utility can be uh accomplished uh in a different format and you know what i would you know a simple example would be new york city hotels um you know the cost to replicate the waldorf store area is probably a million and a half dollars per key you know maybe maybe two million per key to literally rebuild on park avenue that exact physical structure but i'm not sure i would take a lot of comfort um that the utility of a nice place to stay in new york can't be replicated for something less than that there are select service hotels that were built at a fraction of that cost it had new modern rooms it might not have had all the meeting and convention space that the waldorf had might not have been right on park avenue but it had a replacement utility that was attractive to the consumer at a fraction of the cost and you can take it a step further and say well are there certain um real estate uses that can be replicated through technology period um and and how does that impact demand for physical space that's that's clearly something that um people are talking about a lot now that we're in the middle of coven and you think about also like instacart and what it's done to grocery stores right so grocery store is obviously incredibly threatened by amazon and what amazon is proposing to do to grocery stores it's a real threat and it's like what instacart did is almost reduce grocery stores to distribution facilities or like pick and pack facilities right and that's what's happening instacart shoppers are in the stores picking the items and the consumer is never interacting with that store the only asset that store has is its proximity within say a 15-minute drive of the end consumer it's so interesting to think about like how these very lightweight business model shifts can affect the replacement cost of what is today very valuable real estate in an entirely new use and you know one of the other reasons that we've liked industrial and feel like there's still a lot of room for rents to continue to grow is that it is in most markets the cheapest space available on a per pound basis most of the time when people are modeling a real estate deal you think about rental rate increases just on a percentage basis you know three percent increase in rental rates well no one really steps back and says wait a second the end consumer doesn't really think about it necessarily in terms of percentage increases they're probably thinking about it more in terms of what is their total cost and industrial rents relative to almost any other form of real estate is cheap on a per you know price per foot basis um you know rinse and industrial could be seven dollars a foot there are retail rents that could be 500 a foot i think that makes industrial almost by definition less susceptible to disruption because your that space arbitrage that we're talking about it's much harder to undercut the utility that industrial provides as just a you know raw storage space clearly you've got to make it up elsewhere again delivery and logistics costs but it i think we like as well sort of industrial's relative positioning within the confines of all asset classes is just cheap space right right and i guess thinking about another asset class that i know you've been very active in which is life sciences um obviously that's a space that's probably poised for what was already poised for growth but now post covet is poised for more how do you think about the growth opportunities there and what geographies stand out to you as you know particularly opportunistic in life sciences sure i mean if i were to summarize my job simplistically and my team's job it's really trying to identify some of these mega trends that we're touching on that are either technology oriented or demographic oriented and get in front of them and um you know if we can we can identify three or four of them at any point in time and invest a lot of capital before they're widely understood or even if we're just a little bit ahead of the market i think there's a lot of value we can create for our investors and so five or six years ago we were studying the life science office space which is effectively they look like traditional office buildings but they're built out slightly differently to cater towards lab uh pharmaceutical biotechnology companies and the research that happens with within those companies and we in in studying the space we came across a company called biomed at the time it was trading at a worse cap rate than its traditional office peers despite the fact that their tenants were uh incredibly large very large very healthy pharmaceutical companies huge market caps names you could hardly pronounce they were growing like a weed and most of the space was concentrated in these research hubs in cambridge um outside of boston and south san francisco and seattle and san diego and there was something about the network effect that these micro locations created for drug discovery and research and we felt like this was a business that was fundamentally mispriced it had incredible tailwinds from a technology perspective or a drug and research perspective there was more and more funding going into the space uh and this was one of two companies that exclusively focused on building and owning and catering to the life science industry and um after we bought the business i think that a lot of people started to rethink some conventional notions of of uh how the industry was valued and um i think as has been proven out by the success of that investment the world i think recognized what we recognized which was um the uh incredibly strong um supply demand fundamentals in these key research hubs that biomed was largely focused on and obviously kovit comes around and that has only further accelerated the capital and the interest in the space but it is um it's one of those mega themes like logistics that we try to identify um and and get ahead of and uh and deploy a lot of capital into and and you know the only you know our only wish is that we we bought even more yeah and and thinking about just like that particular trend and that insight i imagine a lot of why those hubs are kind of create that virtuous cycle of like talent and discovery and more talent and larger companies being developed in and around life sciences is because of talent right you you can't virtualize a lap right you and i can't have a lab across you know 40 people's homes it needs to be a central location there's always a kind of physical instantiation of a company how do you think that contrasts with traditional knowledge workers and what we think of as like office workers um and i guess the question of just what do you think happens to office like do you think that we are going to virtualize a lot more than we have in the past and what do you think the impact will then be on cities and office buildings sure well i don't think anybody is debating the that question in a life science context as you noted which is which is a positive for biomed the the basic testing drug research has to happen in person i think as it relates to more traditional office uses it's it's probably one of the most interesting conversations within real estate right now um because we're all lit we're living it um i haven't been in our offices here in new york um up until fairly recently and i think companies are really trying to sort through what is the new modern work experience what does that look like in covid and on the back end of covid and i think what we're realizing is that there are a lot of functions that can be done without physically being in an office i think i'm pretty proud of the job that our team did uh in terms of not just kind of keeping the ship together during covid but actually being pretty entrepreneurial pretty offensive um while we were all in different locations and i think that it's um it's it's kind of the you know ten thousand dollar question right now what is the demand for traditional office space look like on the back end of kovit my personal view is that it really breaks down i think into two parts if you think about why you go into an office there is a utilitarian purpose which is you've got wi-fi you've got a quiet space to work you've got a printer um you can you can get your work done and that's one reason why office space exists and there's another purpose which is collaboration and the connective tissue of being in an office with your colleagues and your peers on the combustion of ideas that comes out of conversations that you have grabbing a cup of coffee or going to lunch with peers um the connectivity of having meetings in a central place and an essential market i i think that um the utility of office breaks down along those two lines and i think what we've learned is that just getting work done can be done from a lot of different places today and um it it differs depending on what your own personal um situation is um you know you ask anybody that's got a couple of young kids and they'll say i absolutely need to get out of my house to be able to go get work done um you know for others it it's you know it's not as big of an issue but i think the the real question comes down to can you replicate that type of collaboration um innovation and creativity and training for for junior people on the team in a remote environment and that's the harder question to answer in my opinion i i think we've proven that there is technology that allows us to all be productive while not necessarily sitting in our offices doing the utilitarian part of our jobs i think the technology today is probably not as proven to necessarily be able to facilitate that type of collaboration um and innovation that a physical environment can create so my personal view is probably that i don't think the office business is dead i think that there um you know there had already been weakness for commodity office space even prior to covet i think that will continue to be weak and the the question is going to be you know are are there companies that are able to thrive and maintain their very unique culture in a virtual environment and i think some may be able to do that but a lot i think are going to need physical space to be able to replicate that and so um i'm not in the camp that you know traditional office space is dead but it definitely has its challenges here in the near term that could create investment opportunities i think there are some markets that are more innovation-centric like the lab office business that i mentioned where that the need to be physically proximate to your peers is is more important and there's going to be other markets and other assets that that is less so and those will be those will be impacted accordingly and it's interesting because there's there's kind of a corollary with what happened maybe 10 years before in retail right when this term omnichannel kind of became or emerged as like the in vogue term you have to be where your consumers are um and it kind of dawned on people that oh i actually don't need to go to the store to buy a commodity good like a paper towel i can just have my paper towels delivered through amazon but then the what that did is kind of like put a greater importance on like what only retail can do what you can only do in a physical space you can only try on a shirt in a physical space you can only have an experience in a physical space so the concept of like lifestyle retail and immersive entertainment and kind of like stores being more thoughtful about how they design their stores as like brand marketing mechanisms not just cash register mechanisms and what's interesting is like it feels like that's happening in office right which is the kind of first order things like you described having wi-fi being able to work having a quiet space having a safe space you can have that at home but culture development mentorship these are like higher order things that we're concerned about in knowledge workers that are much harder to cultivate um and i agree with you like i don't think zoom is a replacement for an office building um but i do think there's going to be this kind of blurry line much in the way we talked about with like ghost kitchens it's going to start to get very blurry what companies look like from a real estate footprint standpoint and like that could be more multi-nodal that could mean not just one-quarters many headquarters um so it's interesting to think about that i was curious when you mentioned that life sciences is a category that has to happen in a physical space right so that the disruption of the lab by zoom is not happening um the same is probably true of content production right and i know that you just announced a big partnership with hudson pacific which is a huge vote of confidence and content is going to be produced i'm curious if you could just explain the rationale behind that and how you thought about that and in particular how technology trends and obviously what netflix is doing also influenced that sure um yeah listen along the same lines as what i mentioned in industrial and life sciences our um our investment or our partnership with hpp to recapitalize half of their film and studio business is really premised on the fact that content um has to be filmed in a physical location excuse me zoom won't disrupt the movie studios you know we we all watch a lot of content remotely but it is very difficult to film a movie with people in varied locations right and so to that extent when we had the opportunity to come in um and recap 50 of hudson's film and studio business that was concentrated in some of the best studio space in central hollywood we felt like it was another opportunity to get on the right side of technology and invest in real estate that could not be replicated virtually or otherwise and um you know i don't think anyone would question the just insatiable demand that people are having right now for content creation and you know during covet if anything the supply of that content has been depleted down as we have all you know watched too many shows and too many documentaries etc and movies and our view is that um in addition to just the or organic boom that is uh underway for um the creating content there's gonna be a big push once um it's companies are able to safely shoot again to um rebuild those content libraries and um it there's a there's a short term we think rebound in content creation but a longer term sustained boom and um the deal we did with with the hudson pacific the two biggest tenants are netflix and disney um two of the most prolific creators of content and by focusing on la we wanted to focus on a market as well that had a long history of content creation with incredible barriers to entry and um and with a partner who's got deep relationships with tenants that are um you know at the tip of the spear um in uh in terms of the creation of that content so you know again uh it's not rocket science it's kind of in some ways paying attention to all the things in our own personal lives that we're doing more of um you know more shopping online more reading online about new vaccines and new you know new drug research and treatments and when we're all going to be able to get vaccines and uh and then you know thinking about the fact we're all staring at our screens a little bit more and then thinking about what are the real estate corollaries to those and getting ahead of them yeah i think it's so interesting just hearing how you and blackstone just think about these kind of technology megatrends because you know i love this phrase that like the us economy happens indoors right we are an economy that happens indoors it happens in physical space and the real estate industry is really the industry of monetizing physical space and so as you have these kind of collisions between these trends that it feels like covid probably hasn't changed but is merely just accelerated in some ways it just underscores the imperative to evaluate these technology trends and their long-term implications on real estate which it sounds like it informs all the investments we've talked about today from industrial to life sciences to movie studios you're exactly right it all goes back to where we started which is real estate is just the output um you know no one is um nobody builds real estate in hopes that a netflix gets created you know no one builds us a sound studio and hopes that you know uh you know hulu gets invented it's these are reactions uh to technologies and the relative demand for each of these type of spaces will be heavily influenced by technology and that's why you know our investment in vts is not about us trying to become a venture firm and compete with the fifth walls of the world it's really about trying to have our nose to the ground to understand what are the early warning signs of how there may be shifts in terms of or if shifts or changes in demand for physical spaces and getting ahead of those being overweight the type of space that will be bolstered by technology and be underweight the type of physical spaces that will be impacted or disrupted by technology and so we um you know goes back to our core thesis we're just real estate investors at the end of the day trying to make money investing in physical spaces but you have to have your notes to the ground and understand what's happening in the sort of emerging technology landscape to know how uh these sectors and these geographies will be impacted well it sounds like you're doing it the right way um and very successful doing it so um it's always awesome to talk to you tyler i think your your holistic view of like sociology mixed with commercial real estate mixed with mixed with technology mega trends clearly has led to great outcomes um and i'm sure we'll see more of that so thanks for all your insights today like i said we try to keep it really simple just pay attention to what you're doing yourselves and as the amazon boxes pile up and as the netflix shows pile up we're just sort of on a very basic level trying to say how does that translate into where we should be investing and deploying our capital yeah well awesome well thanks tyler all right thanks brandon you

Channel: Fifth Wall

Views: 6,293

Keywords: Blackstone, Blackstone Real Estate, Blackstone real estate strategy, jon gray blackstone real estate, blackstone real estate asset management, blackstone real estate income trust, blackstone real estate debt strategies, blackstone bio-technology, blackstone bio-tech, blackstone life science, blackstone life-science buildings, blackstone BioMed, BioMed Realty Trust

Id: FyZxhX48DU0

Length: 33min 31sec (2011 seconds)

Published: Thu Oct 15 2020