There’s a silver lining to the pullback in US commercial real estate and tighter construction lending – it should act as a boon in the long term, according to Blackstone’s Jonathan Gray.
While vacancy rates of about 20 per cent have caused “unprecedented weakness” in the commercial real estate sector, especially office buildings, a limited supply from tighter credit going forward will be helpful, the Blackstone president and chief operating officer said in an interview with Bloomberg Television.
“The one benefit to existing owners is that construction lending is getting tighter. I think we will see less new supply and long-term that’s a positive,” he said. “Fundamentals around supply and demand are what drives value. That’s why I have confidence going”
Besides office buildings – to which Blackstone has a less than 2 per cent exposure – other segments of the commercial real estate sector such as hotels, student housing, and data centres are doing quite well, Gray said. Logistics, which comprises about 40 per cent of what the firm owns, have vacancy rates that are less than 3 per cent and rents growing by double digits.
Although there is a lot of focus on the banking sector’s exposure to commercial real estate, leverage levels remain low, Gray, who was previously the firm’s global head of real estate, added.
“Banks probably lent against office buildings at 60 per cent of value so they should have a pretty good cushion. Office buildings as a percentage of their balance sheets are pretty small,” he said.