Blackstone's Gray Sees Lower Real Estate Returns as CMBS Falters

  • CMBS market hurt by global volatility, new rules, he says
  • Gray still bullish on U.S. housing rent and price gains

Returns from U.S. commercial real estate are likely to moderate amid capital-market volatility and muted economic growth, said Jon Gray, global head of real estate at Blackstone Group LP.

“Rates of return are definitely coming down” in the U.S., Gray said Friday at a meeting at the University of Texas Investment Management Co. in Austin. While it’s too early to call the end of the recovery, the property cycle is “much more mature” and investment yields, as measured by capitalization rates, are “very low,” he said.

Blackstone -- the largest private equity real estate investor, and one of the biggest property buyers since the last downturn -- expects higher cap rates as it sells investments from here on out, Gray said. Cap rates are a property’s net operating income divided by purchase price.

Volatility in financial markets and new regulations for commercial mortgage-backed securities make it much harder to bundle and sell real estate loans, said Gray, whose firm manages about $94 billion of investor capital in real estate. “It’s very difficult” to do securitizations now, hindering debt financing for new deals, he said. That is “healthy” for the market, he said.

U.S. commercial-property price gains have slowed after reaching record highs, according to Green Street Advisors. The research firm’s commercial-property price index rose 1 percent in February, for an 8 percent gain over the past 12 months. Prices are still 24 percent above their prior peak in 2007, according to Green Street.

Housing Gains

Blackstone remains bullish on U.S. housing, which “has a lot of room to run,” Gray said. The firm’s Invitation Homes unit -- the biggest single-family landlord in the country, with 50,000 rental houses -- is seeing rent gains of about 5 percent and occupancy at about 97 percent, according to Gray. The division is valued at about $12 billion and still plans to pursue an initial public offering at some point, he said.

Blackstone has been buying shopping centers anchored by grocery stores rather than regional malls, which face major challenges from online commerce, Gray said. Grocery-anchored centers tend to have steady rents throughout economic cycles.

The firm is active in mall investments outside the U.S., he said. Blackstone owns about 30 malls in China, where middle-class consumption is on the rise.

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