Why Blackstone’s $1.1B Bet Goes Against the Grain

The Blackstone Group's $1.1 billion acquisition last week of a suburban office portfolio from Duke Realty Corp. challenges conventional wisdom on multiple fronts -- and departs from the standard approach of grabbing core office product in a handful of markets.

October 24, 2011
By Paul Rosta, Senior Editor

Alpharetta, Ga., one of the 82 buildings in the portfolio

The Blackstone Group’s $1.1 billion acquisition last week of a suburban office portfolio from Duke Realty Corp. challenges conventional wisdom on multiple fronts. In scale, the latest deal looks modest next to Blackstone’s $39 billion acquisition of the Equity Office Properties portfolio in 2007, but today its price tag and geographic sweep stand out. Moreover, the deal departs from the tendency of institutional investors to chase core office product in a handful of markets.

“This is a very, very, very big bet that is cutting a little bit against the grain,” said Alan Pontius, senior vice president and national head of leased properties for Marcus & Millichap Real Estate Investment Services Inc. All told, Blackstone picked up 82 buildings in seven major markets: Atlanta, Chicago, Columbus, Dallas, Minneapolis, Orlando and Tampa.

At first glance, Blackstone appears to be getting good bang for the buck. For an average price of about $110 per square foot, the Duke portfolio offers product that is nearly 85 percent leased and about 15 years old on average. In many cases, Pontius suggested, the price may be less than replacement cost. Conspicuously absent, however, are the elite markets usually coveted by institutional investors, especially Manhattan, Boston, Washington, D.C., and San Francisco.

In going against the trend, Blackstone’s latest move also raises the question of how well it has calibrated risk. “All you need is five of these buildings to fall apart”—lose their largest tenants, for instance—“and all of a sudden your portfolio doesn’t look so good,” explained Dan Fasulo, managing director & head of research for Real Capital Analytics Inc. Nevertheless, he added, Blackstone is looking for yield, and few other investors these days have the resources to place such a massive bet on commercial real estate. “The capital markets will determine whether this is a long-term hold,” Fasulo said. “You could get significant cap-rate compression for something like this without doing anything.”

More than a month before the deal’s scheduled closing on Dec. 1, it is far too early to know whether Blackstone has stolen a march on the rest of the market. Nevertheless, the next several quarters may tell whether the deal marks the start of a trend.

“Blackstone has a reputation for making counter-market moves,” Pontius pointed out. “They probably feel that they’re getting in at the right time.”