The move into data centers reflects how Blackstone, one of the world’s largest landlords, has sought to adapt to a rapidly changing market in which office values have plummeted.
Blackstone’s flagship real estate fund, known as BREIT, has been under pressure for months.
The company has recently promoted its investments in data centers following the boom in artificial intelligence.
Blackstone’s entry into data centers comes with its own set of challenges.
In the past, Blackstone has invested primarily in residential buildings, warehouses, student housing, and other commercial real estate assets, which have proven to be shrewd investments.
Now, with interest rates rising and real estate values plummeting, the investment giant must review its strategy.
Two years ago, Blackstone, including its largest single real estate fund, Blackstone Real Estate Income Trust (BREIT), took control of data center ownership and development firm QTS Realty Trust in a $10 billion deal that made QTS the centerpiece of its data center ambitions.
Blackstone managers said QTS has tripled in value since then and that they plan to expand it with $8.5 billion in new data center projects expected over the next three years and a $50 billion long-term development portfolio.
The entry into data centers reflects how Blackstone, one of the world’s largest owners, has sought to adapt to a rapidly evolving market in which office values have plummeted and even robust segments, such as residential properties, have begun to show cracks.
The turbulence was particularly evident in BREIT, which saw nine months of outflows. It has so far paid $9.4 billion to shareholders who requested reimbursement out of a total value of $67 billion.
Blackstone has struggled to reverse the narrative on BREIT and pitch the fund as a way for shareholders to have exposure to data centers, even though these assets currently make up only a small portion of its portfolio.
Since its launch in 2017, BREIT has grown rapidly in the real estate sector, with fast-growing residential markets and the construction of new warehouses due to the e-commerce boom and disruptions to supply chains of the pandemic period
In 2021, BREIT, Blackstone Infrastructure Partners, and other long-term vectors managed by Blackstone purchased QTS. BREIT holds a 33.5% stake in the acquisition.
BREIT revealed in a financial statement for the second quarter that its investments in data centers, including QTS, now stand at $5.35 billion and represent approximately 5% of its $125 billion portfolio. The category generated $79.59 million in rental revenue during the first half of the year, the statement said, the lowest among all property segments in its portfolio.
According to a presentation to shareholders, QTS grew its revenue to $1.2 billion in 2022, up from $700 million the previous year, when Blackstone acquired it: QTS signed more leases in 2022 than over the previous 15 years combined.
Blackstone is joining a group of investors who are taking an interest in the world of data centers.
A McKinsey study from earlier this year predicts the U.S. data center market will double to 35 gigawatts from 17 gigawatts by 2030.
The growth has sparked greater public awareness that data centers could hit QTS. The company controls one of the country’s largest data center development sites in Prince William County in northern Virginia, which has drawn the ire of some residents and environmentalists, in part because of its close proximity to a field battle scene of the Civil War. A local county official who supported the project recently suffered a defeat in a primary election for re-election, casting uncertainty over the zoning approval needed.
The collapse of that project, known as Digital Gateway, could hit QTS’ development pipeline and Blackstone’s efforts to achieve expected growth.
BREIT has dominated a bullish private REIT sector in recent years, which includes competitors such as Starwood and Brookfield.
The fund offers small investors at least $2,500 to invest and allows them to take advantage of Blackstone’s management and investment expertise normally reserved for large institutions and HNWI individuals. However, investors themselves were alarmed by the decline in property values, sparking a strong demand for reimbursement that began at the end of last year. Blackstone refused to return more than the default limits of 2% of the fund’s value per month and 5% per quarter to avoid having to liquidate assets at discounted prices.
The largest BREIT share class has generated annualized net returns of 12% since its debut in 2017 and has consistently outperformed the broader REIT industry from its inception through June, Blackstone said in a note to shareholders in early August that measured BREIT’s performance against MSCI’s US REIT index.
In its August investor letter, the fund said reimbursements for July were $3.7 billion, “which is 30% lower than the peak in January, the lowest month of buyback requests this year. year and the third consecutive month of declining repurchase requests”.
Original article published on Money.it Italy 2023-09-10 08:00:00. Original title: L’ultima scommessa del fondo Blackstone
