Transcription
All right. Look, I don't really wanna get in the way of this conversation. I don't wanna spend any more time than I have to, but I could not in a million years be more grateful for what we're about to hear, and to be able to do it here on Georgetown's campus in this amazing place. We have Bob Steers, Executive Chairman of Cohen & Steers. But the heart and soul of what we do at Georgetown relative to real estate that we're grateful for. To his left, Jon Gray, COO and President of Blackstone. Second time here, welcome back, Jon, 10 years later. We're grateful for you to be here, my friend. So thank you. And then Joe Baratta, welcome back to campus. Welcome home, Class of '93 Business School. We're very grateful for you here as well. There's a little bit going on, I'm certain in your worlds, and so we're thankful you're spending the time, but you could spend in a lot of different places, but we're glad you're spending it here at Georgetown. And I could not think of three better people to talk to about what's going on in the world today from an investor's perspective than who we have here. So could you join me in welcoming these guys to campus?
(audience applauding)
Well, thank you all for being here. Thanks to President Groves for letting us borrow this incredible Gaston Hall, with its great history. We appreciate it. Thank you. And thank you all for being here on our 10th anniversary, and Jon for his return engagement from 10 years ago. Thank you for that. It probably doesn't need to be said, but the timing of having the leadership of Blackstone here is obviously very fortuitous, with what's going on, particularly in the capital markets, debt and equity markets, the volatility. In our meetings today, I think a lot of investors shared the view that there's so much going on, which may or may not be historic, but they couldn't remember a time when it was so difficult to handicap the possible outcomes. Where does this all shake out? And so that's why Jon and Joe are here. They're gonna tell us. I think neither of these gentlemen need an introduction, but I'm gonna give you an abbreviated one, otherwise we'd be here all day. Jon was mentioned already by Matt. He's President and COO of Blackstone, member of their board of directors. He sits on the management committee and most of their investment committees. And since his appointment to this role in 2018, their assets under management have more than doubled, to over $1.1 trillion. Before being elevated to President, he was a real estate guy, head of real estate. And I think many of you in the audience will remember back in the financial crisis, Jon and his team engineered some of the most iconic transactions in that turbulent time, taking Hilton private equity office, among others, and not only living to fight another day, but generating fantastic returns for their clients. Importantly, more recently, Blackstone, under Jon's leadership, cracked the code on getting alternatives into the wealth channel. Really big development for a lot of our firms. Successfully launching BREIT into the wealth channel, which was a concept that had been wrestled with by many for many years. But Blackstone really got it right and created this opening and has raised over $55 billion in a top performing BREIT. So congratulations on all that, Jon. Joe, as Matt mentioned, he is a Hoya Class of '93. Began at Blackstone in '98. And Joe's been Head of Global Private Equity since 2012, and oversees over $200 billion worldwide. Closer to home, Joe has established in the McDonough School of Business, the Baratta Center for Global Business. Like the Real Estate Center, Joe insists on it being extremely student-focused, and that's the mission, and that dovetails well with everything we do at MSB. So I know you're all anxious to hear their views on the macro environment, but before we get to that, we have, what was it, Joe? How many Hoyas at Blackstone?
- [Joe] I think there's approaching 40.
- Approaching 40, and we have some in the audience who are about to go, and I'm sure some who are aspiring to go. And I've been a fan of some of Jon's videos focused on culture, and the type of culture that Blackstone tries to promote. I think a lot of us get intimidated as we think about Blackstone. It must be a tough place to work, but I think Jon feels differently. And so, maybe speak a little bit about your culture, and what you do to promote a successful culture.
Well, I wanna start by saying what an honor it is to be here in this room with all of you. This is majestic, and congrats to you, Bob, what you built over a decade. And it's wonderful to be back. I think culture's the most important thing. It really, any organization, but particularly in an investment organization.
(Bob chuckling) Oh gosh, oh gosh! Oh, I didn't know that was coming.
- [Joe] Yeah, that's my backup prayer. A little less interesting.
Yes, so, and maybe I'll tie that in. But if you think about an investment organization, we don't have the formula to Coca-Cola. What we have is an immensely talented group of people who work very hard, who've been well-trained, and work together for great outcomes to deliver for our customers. And so what you wanna do is figure out how do I keep our talent connected? How do I keep people motivated? It's not just about financial success, which matters, but it's also, do they enjoy the place they work? Do they feel a shared sense of purpose? And this holiday video started really, out of this idea that we were getting larger, we couldn't connect. So I got this current job 2018. And one of the first things I figured out was we'd grown too large to have one New York City holiday party. And when you think about culture and connecting people, you say, "Gosh, we're one of those firms now that's too big. We're gonna have little group holiday parties, which in and of themselves were growing larger." And I said, "What could we do?" And so the idea was, why don't we start doing some sort of video, as opposed to something sort of stiff or whatever, why don't we make fun of ourselves? And do something that sort gives people a sense of who we are. And originally the idea was we were doing it for ourselves. And let's get the leaders of the firm. Joe's been a star in now all seven of these we've done at this point as well. And we have no acting training, by the way. But the idea was let's do something that connects everybody. And what we found was as this went along, people really enjoyed it. And it wasn't just our internal people, but our clients, and our partners externally. And I think it showed us in a different light. And the more I think about it, you wanna build a place where great people want to come. And where they feel like, "Hey, I can be part of something. There's a broader mission. Here, we're serving clients, retirees, make the lives of a teacher or firefighter better by doing a great job investing capital, in a place where there's a real sense of team sport." And people don't take themselves too seriously. And that's the point of this and some of the running videos and other things I do, which is we just want to be connected and show people we're humans, and we can make fun of ourselves, and we're actually having fun with what we're doing, even though we care a ton, and we're working really hard.
And I think, just to add, the one unique thing about Blackstone is that Jon started 33 years ago. I started 27 years ago. When I started, there was 150 or so, maybe 200 total employees. And we had, we grew up with this small firm. And the one thing Jon has done amazingly well as President of the firm is to ensure that we continue to act and behave like a small firm, where we have relationships with everybody. Where young people feel connected to decision-making. It's very hard to do at the scale now that we have, with 5,000 employees, and across virtually every investible asset class and alternatives. But the focus that Jon has put on that, and our desire to maintain the feeling of the firm we joined nearly, for me nearly 30 years ago, and for Jon over 30 years ago, is what really drives this.
- [Bob] Well, it seems to be working. So, congratulations.
- [Jon] Our acting still needs help, but...
- [Bob] Okay.
We did have Reese Witherspoon and,
- Yeah, that's true.
- Yes.
Do you have a cowboy hat too, or?
- Yeah.
- Yeah.
- I just didn't, yeah, I was on the mechanical bull, yeah.
All right, let's move to the macro here. And I'm not gonna rehash everything that's going on. Everybody here, I think, if you have a pulse, every day is a new day. We've seen, if not unprecedented, unnerving volatility in the debt and equity markets. Certainly the public markets. We don't get to see under the hood so much what's going on in private, which is why it's so great to have you here today. So I don't think I want to ask your opinion about tariffs or about government policy. I wanna ask, how you think about this. How you plan, how you invest, how do you process all this? Because again, as I mentioned earlier, I don't know one person who again, digests each day's announcements or market developments, and trying to extrapolate out where this all ends up. Whether it's in a month, a year. And we all assign, we think about, "Okay, there are three or five scenarios." And that's fine. But you have to be able to probability weight those outcomes. And that seems to be extremely difficult now.
So yeah, the last week has not been for the faint-hearted, as investors. I would say a few things. I think stepping back, the question is how do you approach an environment like this before we get to the specifics of it. And I'd say the first thing you wanna do, is maintain a sense of calm. Because what you learn, and Joe and I and you, Bob, have had the experience of being around post 9/11, or after the financial crisis, COVID, is that you wanna realize, we're gonna get through this difficult period. And you don't wanna make decisions that harm your business or investments because you're sort of caught up in the heat of the moment. So stay calm, definitely the start. The next thing I'd recommend is you think about defensively, how do I protect the things I have? So today, obviously if you have some, a business in the supply chain, or an investment in a business, are they doing the right things thinking about mitigating potential cost increases? Thinking about how they could potentially source product differently? Or price their product differently? Or you have a business where you're finance short term, and you want to get that settled because the environment is obviously dislocated. So you focused on making sure sort of you've batten down the hatches. But equally important, and sometimes even more important is, what are the opportunities that emerge? As investors, you think about, when everyone's feeling great in 2000 or 2007, or '21 is actually the moment of maximum risk. Now many of the things that you wanted to buy had been repriced lower. And if you can step into the breach, and buy things that you think are attractive, first on the public market side, because stocks and bonds trade every day. And people sell because they're very nervous, or because they need liquidity. And sometimes in environments like that, like this, it happens in a very arbitrary fashion. You want to be in a position to deploy capital. We happen to work at a firm where we have $170 billion of dry powder from our investors. So we can think about where opportunity is in a moment like this. On the specifics, what I'd say is, we're obviously in a challenging environment. I think the events of the last couple weeks are beginning to show, or will begin to show in some economic slowing that's gonna come out of this. And there's gonna be a lot of focus on that. But I do think it's also important to note that there are some safety valves here, which are, as we've seen in the last 24 hours, policies can change. The tariff diplomacy can evolve. And we can end up in a much different place next week, or two weeks from now. And my base case is, I do think we'll see a bunch of deals cut with countries. There's probably some baseline level of tariffs that will be in place, but many of these higher tariffs, there'll be deals with individual countries, which will alleviate some of the pressure we see out there. I also think the Fed will be concerned about goods inflation, but when they look at the CPI number out today, and you see what's happening in labor markets where things are softening a bit, wage pressure's coming off. In real estate, rental housing costs are definitely lower than the lag government data. And so I think the Fed has some room if things get worse, to reduce interest rates, which is very helpful for the economy and for asset prices. And then I think the most important thing, from a longer term perspective, is that we are on the cusp, in my mind, of it sounds overstated, but a technological revolution here that what is going to come from AI and the advancements is gonna fundamentally change business and our lives. And that opportunity, which no one's gonna focus on in a week like now, is going to impact productivity and margins and all sorts of things at companies. And it doesn't mean that you very well may be in a business that's facing enormous pressure, and its asset value may have declined. But if you can invest in companies that may be benefiting from these very powerful long-term trends, and you can now enter that company at a 25% lower valuation, that may be a good thing to do even though you have these risks in mind. So I think you have to be clear-eyed about the risks, but at the same time, you have to look at the bigger picture and know not everything that people start focusing on all the worst case scenarios, and good things or things that soften the blow can happen, and some of these long term trends stay. So I think having a longer term perspective in moments like this is super important.
I think that's great advice. But I'm gonna pull you back to the medium term. Are you concerned that if the type of environment we're in now persists, one concern I have is that something breaks, the debt markets, all this money that's going into credit, that's unregulated, hedge funds. Something in the financial system just getting...
Well, I would definitely agree that getting resolution to this high degree of uncertainty is helpful, doing it faster.
Right.
And yes, the longer you have periods of heightened volatility, the risk goes up. That something we hadn't thought about, some counterparty somewhere, generally it's tied to leverage.
- [Bob] Right.
- Something goes awry, and that has some sort of domino effect. And we saw a little bit of this when Silicon Valley Bank went bust. After the bond market had traded off so massively, and we saw the mismatch of assets and liabilities at that point in the banking system. So I think to your underlying question, the faster we get this resolved, and investors and people in the real economy have clarity, the better. So I would agree.
On that, just, this is for both of you, but the tariff thing has landed poorly with some of our longtime counterparts. And I wonder what this lack of trust potentially means for global investing, in your mind? So...
Well I think, clearly, we're in a globally interconnected world. And we invest globally, elsewhere, other countries, and investment pools invest in the United States. And I think it goes back to your earlier question, the faster you get resolution of these matters, I think the easier it is for tensions to go down. Because I think most places in the world have a natural affinity for the US, for our rule of law, for the liquidity of our markets, for the dynamic companies here. And they have affinity for our culture. And so I think there is, we know, from talking to people around the world, strong desire to invest in the United States. And so I think resolution of some of these conflicts will not only be good to get market participants calmer, but will reduce some of that tension.
I'll add a few things to the conversation. On the point of America losing its privileged place in the capital markets, and as a destination for investment, I mean, this is the most dynamic, innovative economy in the world. It's the most liquid capital markets. Yes, there's noise, this too shall pass. And the American economy is the engine of growth for the world. And I think that will endure. There was lots of conversations in the financial crisis and immediately in the aftermath that this was an American housing creation and America's gonna lose its position as the reserve currency, that the American banking system was structurally impaired. And what happened in the decade after that is America became even more the reference. Currency, the reference capital market, the biggest liquidity pool. And I think that is undeniable. I really do. So, the other thing I'd say about some of the other things we mentioned, "How do we think about defending our portfolio?" It starts with do you own, my relative calm is as a result of the quality of the businesses that we own. So one big mantra of Jon's for many years, and what he's learned as an investor is that the bigger, the better, the best positioned in the good neighborhoods, you can withstand... The idea that you buy Hilton in 2007 at the exact wrong time at a high price and it becomes one of the largest gains or the largest gain in real estate, private equity history. And one of the largest in private equity history is a testament to this strategy. So we have been making sure that if we buy a company and its costs go up temporarily by somehow, it can endure, and it can withstand the pressures. I don't believe, the US economy, and the can't withstand 145% tariffs on China, like indefinitely. It's not going to happen. I wouldn't underwrite that to happen. So we wanna use this opportunity to buy other really good businesses that are now for sale more cheaply. Because Mr Market is saying the world's gonna end or this is gonna persist for longer. So one thing, our experience in private equity, one of the biggest determinants of return is the year in which you've bought the business because that's when values were cheaper. So if you bought things in 2012, if you bought things in the aftermath of COVID, and you bought good businesses, you did extremely well. And so on offense, we're thinking about this as an opportunity to buy high-quality businesses at better prices.
Well, that all makes perfect sense, and again, you guys distinguished yourself, or none others coming out of the financial crisis. So I think that's great advice. I'd like to move on to just the private equity business in general. And we spoke about this in the last week, where private equity returns over the last two or three years have been okay, but below long-term averages, single digits have lagged behind public markets and credit strategies and infrastructure. And we read a lot about frustration about limited exits and realizations. My question, 'cause that, it's a little confusing to me, because as you mentioned, we're in a period, at least until the last month, we had record high public market valuations, we had record dry powder. And so be interested in hearing your views about what's going on in private equity generally. This is not a real estate question, it's across the industry.
Why don't you start?
So this is an important question. And of course one that we've been asked... To the point of vintage mattering, to the extent you bought something in '21 at the top of the market, it's performing less well than what you might have bought in 2022, once the rate cycle had happened. So if you look at private equity fund vintages from 2018 to 2022, the performance of each of those vintages of the private equity industry is well above public markets with the exception of two years. The 2021 and kind of early 2022 vintages, which are sort of in line maybe a little bit below as an industry for the public market. But if you look at the deals done, and we just have our own portfolio that we did, post the rate-tightening cycle from the summer of '22 until the end of 2023, those are some of the best performing transactions that we have invested in in the last decade. So I don't think it's right to say that private equity returns are underperforming the public markets. It depends on what periods you're comparing. Yes, there were two years.
I think that's less relevant than compared to your historic returns. Investors, if you're locking yourself up, you expect premium returns. And so it's just, and I know private real estate got marked down because there's a pretty well-embedded pricing structure with cap rates and so forth. So that's happened. I just am curious about, what valuations look like in the rest of the private equity world?
The 2021 vintage of deals will underperform historical performance. But that was a moment in time. And a lot of capital was invested too quickly in that moment. But the 2022 vintage I think will be right back in line with where private equity has performed historically. And obviously capital we're deploying now, I think, is gonna perform very well compared to history. So I think people get fixated on the '21 vintage. It happened to be when a lot of capital was invested a lot more than maybe on average over the prior five years. So dragging that through the returns, that vintage, will be a drag, but subsequent vintages and the ones prior to that, are all going to continue to outperform public markets.
And I would just add to Joe's comments. If you look at our clients, the big pension fund, sovereign wealth funds, endowments, who've been investing, private equity has been their best asset class for a long time. And yes, there have been periods of time immediately after the financial crisis, now the last couple years, where there's temporal under-performance. But in the fullness of time, the asset classes continued to deliver this excess. And I think the idea of intervening in companies, improving their operations, putting in place incredibly talented management teams, the incentive system, all the things we bring to bear, that hasn't fundamentally changed. So yes, if you take one moment in time, maybe, but I wouldn't bet against this business. And from a valuation standpoint, we're actually the biggest investor in secondary, so in other people's private equity funds, and we have a pretty good insight. I think the industry generally is pretty fair on where it's carrying things. It's been a number of years where things have been sort of flat, they've grown into those values. So overall, what we've seen in private assets, and the reason why the asset class overall has grown so much is because of our performance. And what you've seen is this bifurcation where capital has flowed to the highest returning sectors. In many cases, ETFs and index funds on the liquid side, and then to alternative asset managers on the private side. And to the extent, we don't do that. So if private equity does, as somebody might premise, say, "Oh it underperforms." The capital will go away.
- [Bob] Right.
- We don't believe that's the case. And so for us the focus relentlessly has to be on delivering returns for our customers.
So where are you seeing the capital flows going in private equity? You have a lot of choices, buyouts and real estate, energy transition, things like that. Where is the big money going?
Well today, I'd probably point to two areas. Private credit has grown an enormous amount. And part of that is cyclical in nature, which is, interest rates went up a lot. And during the dislocation, spreads went up. So you were getting equity-like returns, mid-teens returns for lending money. That obviously wasn't gonna persist forever. We're seeing some of that, of course, normalize. But then there's a part of this that is more structural in nature, which is, what we're doing in private credit is taking our institutional clients, taking a pension fund, and bringing 'em right up to the borrower without the securitization, origination, financing costs. And that direct-to-customer model, farm-to-table, allows the private credit investor to get a higher return. That seems enduring to me. And I think where you're gonna see that grow the most is in investment grade. In all sorts of parts of the real economy, infrastructure, real estate, consumer finance. All these basic areas of the economy, I think that'll grow. And so we see a lot of interest from clients in that area. The other area, speaking,
Before you get off credit, I couldn't agree more. It sounds like a brilliant opportunity. Except it seems like there's a credit fund launched every week. And your approach obviously will endure. You're conservative and... But there are folks who are concerned that it's largely unregulated. And so the lesser players, there aren't a lot of barriers to entry other than capital.
- Yeah.
- I guess.
Well I think you have to think about what is, when you think about regulation. Lending is not a fundamentally risky thing to do. It's obviously safer than equity, for the most part. The reason we regulate financial institutions the way we do is because of the quantum of leverage they operate. 10 to 14 times levered. And because of the fundamental mismatch, which is essential for society. But you have short-term deposits, financing, long-term investing, long-term loans. If a market participant, if we do this on behalf of the Georgetown Endowment, and we do it on an unleveraged basis, there's no systemic risk because it's being done on a leverage basis. Or in our BDCs, one times leveraged. There's not the kind of risk, there's not the kind of mismatching.
- [Bob] Right.
- Now, could people make bad loans? Sure. But unless they're highly levered, and mismatched, and/or mismatched in duration, it's not creating a risk for the system. So I think the risk, and when we look across our portfolio, loan to values today are still pretty low. This isn't like the 06/07 period. So when you think about risk in the financial system, I would not put private credit high up.
And historically, sub-investment grade corporate credit default rates through cycles has been quite low. And to Jon's point, I think private equity firms in general at the large end are buying bigger, better, more resilient companies. And so I don't see this as systemic risk. I don't see loss ratios being particularly high, even in a very difficult economy.
I was gonna answer the other area where the money's coming would be in the infrastructure space. And I really see that as financing the future of the economy. Back to my earlier comments on what's happening with AI. And today we're of course using it to download our photos, to get cartoons. But I think a world where we all have little bots who help us, and virtual bots, and then robots. I think that world's coming. And we're gonna need an awful lot of data centers. And we're gonna need a lot of energy and power. And both of those things are in the infrastructure area, as well as transportation. But those areas are attracting a lot of capital because there's a huge need for investment. Really like a new industrial revolution that's required as we switch from what has been really a service and not really power-intensive economy. Interestingly, power usage in the US over the last 20 years has basically been flat. It's now starting to grow four-plus percent a year. To the point now where utilities are growth companies. Not things you would naturally expect. So I would say that's an area where investors have had a lot of good experiences, and where more capital's moving. Where are people more reluctant today? Real estate, it's been a tough few years, rates went up a bunch. The office business got hurt badly and people tend not to want to jump back in to an asset class where they've had a poor experience.
That's a great segue to my next section, which as many in the audience know, this last night, we decided to change the name of the Real Estate Center to a Real Asset Center, recognizing the importance of infrastructure to our students. But at the same time, everyone seems to have a different definition of what infrastructure is. What do you include in infrastructure? And even within that, is it infrastructure? Or is it real estate? And at our firm, we have teams that are fighting over. The real estate guys say, "Well, data centers and cell towers are real estate." The infrastructure guys say, "Not so fast." And so I'd love to hear how you think about how do you define real assets, and in particular, infrastructure? How do you organize internally to analyze and invest in infrastructure? I'm gonna get to real estate before we run out of time, but,
So look, on infrastructure, we've tend to focus on energy, transportation. And those are pretty clearly infrastructure-esque areas. Digital has been the one, you're not the only firm where there's discussions. And we've been very solomonic where we do our data centers and we're the biggest investor in the world in data centers. Half in real estate, half an infrastructure. We've done our towers and fiber and infrastructure. I don't know if there's a perfect division, but we've found this, it seems to make sense to us.
But we are, just to add, we are strict constructionists in the definition of what infrastructure is.
- [Jon] Yes.
- Durable, contracted, non-speculative cash flows. And things that don't have real operating risk and volatility. So ports and roads and contracted cash flows and data centers. Energy infrastructure that has offtake agreements and that is the nature of infrastructure, for us.
And how do you think about, and help us understand your return expectations. Because my sense is some ports and airports, the return, there's not a lot of growth necessarily. They didn't use to be. And so they were very safe, income-oriented investments that you probably weren't looking for 15, 20% IRRs. Whereas obviously digital infrastructure is high growth.
Yeah, we've started out really with, I'll call it sort of a core plus approach to infrastructure, trying to get, I'll call it low double-digit net returns. We've actually done much better than that. And it's really credit to Sean Klimczak, who worked under Joe for a long time, who was in our private equity and then our energy private equity business, who brought, interestingly, I think a growth orientation, and a private equity mindset to infrastructure, but not by stretching the definition, but by buying great platforms in these spaces. So buy a great ports business and do a bunch of acquisitions and expand your existing ports, go into data centers, and expand aggressively. Do the same thing around roadways and other things. And don't just buy long-term bonds.
- [Bob] Right.
- If you end up just buying project level financing, there's only so much you can do. But if you actually own the platform itself, you can do add-on things, you can build things, and those are higher ROEs. And so we've taken a business that traditionally has been, yes, oftentimes, focused on lower returns, and tried to make it a business that's really a platform business that can grow. And we have the benefit of doing it in open-ended funds. So we get to own these things, like a long term.
That's my question. So how do you deliver these different infrastructure investments to your clients? Is it one big fund? Do you specialize? How do you...
Most primarily it's a main fund, but we do co-investments. We're raising some regional pools. We're starting to do some different things, but mostly it's one large pool. So it's different than if you think about most of Joe's businesses, it's done through traditional drawdown funds, closed-end funds. This is more in an open-end fund, more like a real estate open-end fund.
All right, we're running out time, so I've gotta get to real estate here. And you guys have just knocked the cover off the ball with your thematic approach to real estate investing. Data centers, industrial, single-family homes for rent. And again, I've said last night to our group that in the old days, you had four choices, right? You had office, industrial, retail, and now, you have to be really long-term in orientation. You have to be, I think, willing and open-minded. Single-family homes for rent was a controversial topic. I think you had to explain for many years that it's a good thing, and there'll be attractive returns. So if you could maybe just bring us up to date on, do you still like the themes that you've been riding for a few years? And you you wanna share any brilliant insights for the future?
I don't know how brilliant. But I'd say a couple things. Maybe I'd start at 10,000 feet with just the real estate cycle, which is, we've been through a difficult period of time. For most of real estate, the fundamentals have actually been fine. Apartments and logistics have seen their cash flows grow, even retail. But what hurt was what Joe described, when cost of capital went up and rates went up a bunch. And so cap rates went up from three and a half to five and a half. And that's painful even as cash flows kept growing. The exception where the fundamentals really deteriorated was the office market, where people stopped going to work. I strongly recommend you go to work by the way. (audience chuckling) It's one free piece of advice, which Joe and I definitely believe in. But that sector not only had the cost of capital go up, but the cash flows went down pretty dramatically. Occupancies and rents. Where are we today? Well, we're in the good part of the real estate cycle. Like when I started my career in the early 90s, or after the financial crisis, prices had fallen. And then new supply really importantly has fallen. So in the biggest asset classes, we've focused on rental housing, multifamily, in particular. But also single-family, we've seen big declines. Logistics starts are down 70%. And it's not a complicated business, right? We're not gonna live in our iPhone. So if we stop building, at some point, you have a shortage and the rents are gonna start to run. So you have a good fundamental dynamic. And then on the cost of capital, the 10-year, although it's gone up here in the last little bit, is still down, I don't know, 50, 60 basis points from its highs 18 months ago. And equally as important, spreads have tightened, as real estate debt has come back. And they probably tightened 100, 200 basis points. So you're lining up here for a recovery. And back to where we are in the cycle, the investor mentality is, you work at a large pension fund, everybody comes to the table, the infrastructure person's been doing great, right? The private credit, the person in private equity, they're doing okay, but they haven't returned as much capital. And the real estate person's hiding in the corner.
- Right.
- And,
They're all out here somewhere, right?
- But let me tell you, so it's not the easiest time to get a job in this space. But of course, it's the best time to go in, because the fundamentals are lining up for what'll be a good recovery. So we are leaning in and buying stuff. We're specifically, I would say, we continue to like logistics because you have the benefit of this reindustrialization and what's happening, all this building in the US and the e-commerce thing just keeps going. There's definitely still a shortage of housing in this country. So both multi and single-family are attractive. But I would say for the highest returns today, I think the office market,
Lean in on this one.
- Yeah. I think the office market is probably the most compelling. Now, I wouldn't buy older buildings.
Wall Street Journal gets very excited. You've bought a couple.
- Yeah, we bought a couple.
- And everyone started getting excited.
Well, because it's a tiny portion of our portfolio. Over the last decade, US office buildings dropped to about 1% of our portfolio. So it does say something. And we're saying it because you're buying these assets down 50, 60% in value from where they were five years ago. And nobody's building them in New York. There's literally nothing new that's gonna get delivered probably for five years. And companies like ours are gonna grow.
And people are gonna go back and work in a physical location.
- Yeah.
- They already have, but it'll continue.
- Yeah. So I would say I think that is very interesting. And by the way, we've talked mostly here about the US. I think Europe, the dynamics are very similar. The values fell as cost of capital went up, as cost of capital normalizes, and there's very little new construction, it's a good time to buy. So one of the great things about our firm is, because we have all these different engines, so it's been a tough time for some businesses like real estate, but a great time for private credit, a great time for our infrastructure business. And as we move through a cycle, some of these businesses will ebb and flow. The key is, again, in all of 'em, we have to make sure we deliver for the customers.
Would you agree though, the office market, well, there isn't one office market.
- Yeah.
- It's still a dangerous place for neophytes.
- Yeah, I mean,
- We know new construction in Manhattan's gangbusters, that's great buying into that. But buying on the east side of Park Avenue is not for amateurs.
- No, I would say this. It's pretty easy to buy warehouses and apartments today, given the fundamentals I've described. Vacancies are 5%. Most office markets in the US are 25-plus percent vacant. So you're right, you've gotta, you need a little intestinal fortitude, and you have to be careful the type of building. And it is not a cashflow play. In many cases, you've gotta lease these things up. And there's uncertainty. But I would just say from a value standpoint, to me, it seems pretty attractive.
- Right.
- But if you wanted to say, what's an easy way to make money? I would say in some of these big sectors where the fundamentals are good, you can buy this stuff, it's the right time in the cycle. And the pace of the recovery and value, if rates end up coming down, it'll be much quicker. If rates stay at these levels, then it will still get to the same terminal point, it'll just take longer. And it'll come not through cap rates coming down, but through cash flows. Because there'll be very little new construction. And one potential positive for those of you in real estate, regardless of where these tariffs settle. And I do think there'll be a base rate of tariffs pretty much for all countries after this. That means that many things inside of buildings will have incremental cost. And when it costs more to build, it means the existing assets have to go up more in value. So your existing stock becomes more valuable.
Makes perfect sense. I know our tradition is we allow 10 minutes or so for questions, as Matt. I have one more question before I let you ask yours. You made the success of raising the capital and deploying the capital and BREIT look easy. And there's been a rush. And I think this is a broader trend that maybe some other session we can talk about, where the success of BREIT sent a message to many of your brethren in the alternatives business that, "Oh, the wealth channel's open, we're all gonna rush into the wealth channel, 'cause Blackstone raised 55 billion, this is a new vein that we can mine." And our firm being roughly half in the wealth channel, we know how difficult it is. You not only have to have a great brand, premium track record, but you also have to have distribution and you have to understand your audience. And I've never really, I've only read about how much money you've raised, how successfully it's been deployed. The returns are phenomenal. And it just looks easy, I think, to the outside world, and even maybe to some of your peers and the non-traded REIT market has lots of entrants, but not that much money has been raised, other than you guys. Talk a little bit about what it took to succeed there. Because there hasn't been a lot of replication of your success.
Well, it starts,
And has implications I think, for the whole idea of getting alternatives in the wealth channel.
It starts at the fact that we're a firm that's constantly thinking about how we can grow, how we can serve our existing customers, new customers better. Steve Schwarzman, our CEO, the founder of our business, is always pushing us to think expansively. And what I'd say is, if you look in private wealth historically, individuals did not have access to private assets. Even though their liability profile, they may not be retiring for many decades or they have a long duration, they don't need all their current liquidity, particularly affluent people. And wouldn't it be nice if you brought the quality of what Joe and our various teams do to individual investors in the private wealth space? The things I think we did, starting almost a decade ago, were create products that looked a little different than our drawdown funds. They were semi-liquid, they were offered on a monthly basis. They had liquidity either monthly or quarterly. But we brought the fees way,
- [Bob] Getting down the fees.
- Yeah, I mean, what people don't realize is, historically people were just focused on enriching themselves, not on the customer's experience. And we had this brilliant insight, and I say that facetiously, to lower the fees, the upfront fees, the acquisition, the disposition, to charge similar to what we charge institutional clients. And rather than having a bunch of inexperienced people, we took world class people in our investment process, and put 'em in the business. And that's what produced the outcome. Plus we managed the liquidity thoughtfully, to the point now where we're doing this not just in real estate, but in credit, in private equity, in infrastructure. But I think, Bob, you're totally right. You have to have amazing people. You have to have great process. You have to have legal, you need all this stuff to do it right. And you have to be out there at the different offices with people. And we have 300 people in the wealth business. So, I would say it's,
And we invested in the distribution infrastructure over a decade ago, so we've been covering the wirehouses and the RIAs and the wealth channel with great human beings. Real estate was the first, but we've been investing in that for many years, that distribution.
- Yeah, I think it's way more capital-intensive and labor-intensive than again, you guys made it look too easy.
Well, and you need a brand and that's super important too.
- Right. Okay. Matt, what do you have for us?
- [Matt] I appreciate that. So we have a lot of students in the audience of course. And so there's a lot of, or a handful of questions that came in from the students. And I'm gonna go to Joe first on this, right? Joe, obviously you're a graduate of this fine institution. How does your Georgetown education experience impact what you do on a day-to-day basis? And basically, your work generally at Blackstone?
I think Georgetown produces students who are first enormously curious, that are humble, that do not come to their work with this sense of, "I've figured this out, and I'm owed something." There's a humility to this place and to its graduates and there's an underpinning of ethics and morality and how you should treat other people, and how you should be in service in part to others, not just yourself. And I think that is distinctive about Georgetown. And that underpins how I engage in my work. And we were talking earlier to some students, Jon and I, the idea that we as individuals could be in this place. That peoples have entrusted us with capital, that we see what we see. I'm just a kid from Sacramento, and neither of my parents graduated from college. Like that sense of wonder I think, is also part of the Georgetown student experience. So we don't come to these things with, "I've done all these things, you now owe me this amazing experience." It's like, "I am grateful to be here. I want to contribute to the best of my abilities."
- [Matt] So I'm gonna stay with you on that then, Joe. You're obviously have been a big investor in Georgetown. We have the Baratta Center here. What do you see as your ambition with the capital you've invested and what you hope to see achieved here at Georgetown?
I think Georgetown is unique in higher education for the distinctive schools that it has, in the college and the SFS and in the undergraduate business school. When I was a student here, it was hard for me to piece together a multidisciplinary education. I was a government minor. I wanted to take as many courses as I could in the School of Foreign Service, but it was hard to do that. So my engagement was to try to push the university to take advantage of its comparative advantage, and deliver multidisciplinary academic programming, joint degree programs. And the university has responded. And we are doing that now at scale. I think President Groves said the last four majors introduced have been a joint degree programs, which is amazing. So the center that I've funded is meant
To be, and I think we're gonna change the name of this center to be the Center for Global Business Education. It is meant to be in service of the students, and in furtherance of the objective of making Georgetown the best place to study global business. So everything we do, academic, co-curricular, research, will be in service of that. Making Georgetown the best place it can conceivably be for the study of global business.
(audience applauding) Thank you.
(audience applauding)
- [Matt] I appreciate that. And we have a very similar view in the Steers Center. So last question here is, obviously, you're a destination shop, from a job perspective. Any young person at Georgetown would be more than thrilled to have the opportunity to go and work at Blackstone. Those that have that opportunity, we have several interns that are gonna be with you guys this summer, and obviously full-time. Which ones succeed and outperform, versus those that are just okay? And not just Georgetown, across the board.
- I think it's the people who genuinely have a passion for what they do. And they care a ton. If you're doing this to credentialize, or you think you wanna make your parents happy, it's very hard to do these jobs. They're super demanding. Almost in whatever element of our firm you join, these are not nine-to-five, five-day-a-week jobs. And so the people who show up and say, "Wow, I'm learning a ton. I love what I'm doing here. I'm fascinated by investing, or fundraising, or asset management, whatever element, I really genuinely have a passion for it, and I care a ton. So I'm there earlier. I double check my work, I wanna make sure I have this super high standard of care." And ultimately as they learn, the ones who are willing to sort of raise their hands and speak up. And I think when you get, one of the tough things about a Blackstone at our size is you get people and they're intimidated, that sort of thing. And what we really want is somebody who says, "Hey, Jon or Joe, you guys are wrong." Like, "Hey, we should be doing this this way." Because we didn't get, the way we do things, is just because of some historical practice. It may not be the best. So people who love it, passionate, care a ton, but ultimately to really rise up, those who are willing to push the envelope. To see and do things differently, to be entrepreneurial, to advocate for their position. And when you bring that all together, plus a human element where they're team players, and their fundamentally nice people. And if you get that whole thing together, and it's a lot of the way, what Joe was describing, what a Georgetown student is, that, if you bring that package together, you can have a lot of success. And what I love about our firm is, even all these years later, it's our 40th year, I still think a young person can come to Blackstone and have an amazing career and a huge impact. And it's because of the way we continue to run the business. So it's probably true at a lot of places, but if you really bring passion and the right attitude, I think you can have incredible success.
- [Matt] Joe, anything to add to that?
- And patience. And a long term perspective on your career. Great private equity investors aren't made in 24 months.
- [Matt] So I will add one more. How do you both remain a student?
- A student?
- [Matt] How do you remain a student of your craft, of your discipline, of your industry?
- Well, we're in a very humbling business. If the last week didn't remind us of that, I don't know what does. You're in a business where the world is changing. And Joe and I were doing an investment committee this week on a business in India that has had a tremendous amount of success over a long period of time. And the discussion is around, is the technology that's coming gonna fundamentally disrupt what's been done? Or because of its incumbency, the business will continue? And it's, I don't know, it's not unknowable, but it's a hard question. And so if you don't have humility, if you aren't asking question, if you aren't reading things, I don't know how else you can do this. Because the future's changing so much. So I think the difficulty of the business and the fluid nature of the world we live in, means that you have to be reading, you have to be learning, you have to be asking questions, you have to be traveling. And all of that gives you some tools plus your experience to try to make good judgments. But we make mistakes. I have, Joe has. And it really hurts. And then you try to learn from that, and be better going forward.
- And I think you have to constantly question like, what your dogma is in the moment. Like, is this right? Is this still relevant? Have we missed something? You start seeing people do things that look outside the norm. The younger people start saying, "Geez, we're missing this." And so you cannot be rigid in your thinking. And you have to constantly challenge yourself, like, "Maybe I don't have this right, maybe the world has moved, maybe this sector has changed." And that again, it's back to humility, and the ability to question what you hold dear.
- [Matt] That's all the questions, Bob.
- Great.
- [Matt] Jon, Joe, thank you so much for sharing your thoughts with us tonight.
(audience applauding)
- Thank you, Bob.
- Thank you, Bob.