(Bloomberg) -- Blackstone Inc., the world’s largest commercial property owner, said the worst is over for the global office market after a prolonged slump fueled by the pandemic.
“Office has bottomed, particularly in stronger markets and better-quality buildings,” Blackstone President Jon Gray said in an interview before the firm reported fourth-quarter earnings Thursday. The results showed a surge in profit even as the real estate business slumped.
Valuations for US offices have tumbled 50% to 70% from their peak, he said, and they’re poised for a rebound.
The declaration marks a shift for Blackstone, which has been touting its retreat from the office market. Traditional US offices account for less than 2% of the firm’s real estate holdings. That’s down from more than 50% before the 2008 financial crisis.
That could soon change, with Gray saying Blackstone is now evaluating fresh office bets. The firm is nearing an agreement to purchase a Midtown Manhattan tower, in a return to New York office dealmaking for the investor, Bloomberg reported earlier Thursday.
“We would be willing to buy properties out there,” Gray said.
Gray, 54, led Blackstone’s real estate business for years before rising to become the firm’s No. 2 executive, after Chief Executive Officer Steve Schwarzman. His statement is likely to resonate with a real estate industry that’s desperate for relief.
The office market is reeling from vacancies and slumping valuations as many workers who stayed home during the pandemic have yet to return.
Blackstone reported a fourth-quarter profit that topped Wall Street expectations, but real estate continued to drag on results.
Shares of Blackstone fell by nearly 2% to $181.70 at 9:36 a.m. in New York.
Distributable earnings — or profit available to shareholders — rose 56% from a year earlier, the New York-based company said in a statement. It totaled $1.69 a share, beating the $1.48 average estimate of analysts surveyed by Bloomberg.
Private equity dealmakers stepped up the pace of selling investments, helping drive Blackstone’s realizations to their strongest level in 2 1/2 years. The credit and insurance business increased what it took in from investors in the quarter to finance companies, dominating the firm’s inflows.
Gains in fee-related earnings and distributable earnings at both units helped Blackstone overcome its muted performance in property investments.
The real estate business, a major force in warehouses and apartments, faced an increase in base rates in the fourth quarter — and its bets depreciated during the period. Its fee-related earnings and distributable earnings sank.
Data Centers
Data centers helped mitigate further losses for the real estate arm and lifted the infrastructure team’s returns.
The firm has poured ever-bigger sums into power-hungry data centers in a bid to become the largest financial investor in artificial-intelligence infrastructure. Late last year, Blackstone said its portfolio includes $70 billion of data centers and more than $100 billion of prospective developments in the pipeline.
Blackstone has benefited from a shortage in the infrastructure to drive AI advances and surging demand for data centers from Big Tech.
Now Chinese startup DeepSeek threatens to complicate that investment thesis.
DeepSeek claims its AI models offer comparable performance to the world’s best chatbots at a fraction of the computing cost. That challenges the idea that AI will require ever-increasing amounts of power and infrastructure.
Gray said he doesn’t think digital infrastructure has lost its importance.
“DeepSeek says to me the cost of compute is going to come down a lot,” he said. “Therefore the usage of AI and adoption will go up.”
Gray added that Blackstone has $80 billion of leased data centers today, meaning that a steady stream of cash has been locked in for a chunk of its portfolio.
Even if tech firms invest less in training AI models, this could leave them more money to spend on inference — when an AI model makes predictions — and cloud-processing, Gray said.
“Digital infrastructure remains essential,” he said. “The power and electrification with it is also going to be essential — if anything, more essential — with faster adoption of this technology.”
--With assistance from Steve Dickson and Erin Fuchs.
(Updates with additional context, share moves starting in ninth paragraph.)