Blackstone, one of the largest business owners in the United States, reported its highest-ever profit year on Jan. 27, thanks in large part to rising rents on its real estate portfolio. Blackstone reported net income of $1.4 billion in the fourth quarter and $5.9 billion for the year, nearly six times what it earned the previous year.
This premium reflects the changing ways Americans live, work and shop during the pandemic. Since 2019, more Americans are looking for bigger homes and buying more online. This has spurred demand for warehouses and logistics facilities, as well as pressure on residential rents.
Institutional investors like Blackstone, now valued at $84 billion, have increased their assets in the sector. Much of Blackstone’s recent growth has been driven by the company’s real estate holdings, from residential to commercial buildings, particularly warehouses.
During the Jan. 27 call with investors, Blackstone executives explained that rents in real estate sectors in their portfolio had risen up to two to three times faster than the overall inflation rate. Relatively short leases on their properties allowed them to quickly raise prices, capturing more value from tenants, even as the inflation rate in the US economy topped 7%. Blackstone’s real estate portfolio includes everything from massive data centers and industrial warehouses to apartments and single-family homes, primarily in the southern and western United States. He leads a wave of institutional investors buy houses in the suburbs.
The United States has seen significant, fast rent increases in 2021 driven by surges in demand triggered by the pandemic. In some cities, median asking rents have increased 30% or more during this year. This put pressure on some individual tenants struggling to afford rent increasesbut it has helped generate huge profits for business owners like Blackstone who own the real estate.
In remarks at shareholders on Jan. 27, Blackstone’s chairman. and COO Jonathan Gray said, “In my 30-year career, I have never seen the real estate fundamentals in the sectors we focus on as strong as they are today.
Blackstone’s flagship year
Real estate has become Blackstone’s most lucrative business. Led by its Blackstone Real Estate Investment Trust, the company has over 3,000 properties, including some 950 million square feet of logistics real estate. It also made a huge investment in single-family rental homes in July 2021 when it acquired Home Partners America and its more than 18,000 single-family rental homes.
These investments paid off – nearly half of Blackstone’s revenue for the year came from real estate, the most of any business segment. By strategically buying into rental housing and logistics in particular, Blackstone has established itself to dominate in two areas that have seen rapidly growing demand; logistics companies like Amazon are hungry for more space to expand e-commerce supply chains, and American families looking for single-family homes but unable to buy. One September 2021 report Blackstone’s real estate portfolio shows that nearly all of its residential and industrial rentals had occupancy rates above 90%.
Why the rent is so high
Even though demand for new home construction is increasing, inventory is not. New house construction lagged behind population growth for years in the United States. The construction industry has been hampered by labor shortages, material cost increases and delays during the pandemic. The insufficient supply of affordable homes for sale is pushing more people into the rental market, which is keeping demand high.
Rental prices, especially for units with two or more bedrooms, have skyrocketed in 2021. The latest national report on rents according to the online rental platform Apartment List, rents increased by 18% last year. The pandemic has also triggered huge swings in demand in rental markets, as people first left cities in droves and rents fell, then came back, creating a new wave of demand.
But much of that increase can be attributed to consumer price inflation as the U.S. economy recovers from the effects of the pandemic. As inflation rises and rental demand remains high, landlords have an incentive to raise rents. Commercial landlords like Blackstone have the opportunity to do this when leases turn over quickly, increasing the value of what Gray called “short-lived durable assets.”
These conditions may change. The Federal Reserve should raise interest rates as expected in 2022, helping to curb inflation and cool the rental market to the benefit of landlords.