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Blackstone’s Boom-time Deal Nears Finish Line

Blackstone is poised to make money on a huge package of office properties bought near the peak of the real estate boom—cashing on strong prices in core office markets.

Anonymous sources within Blackstone say that the firm is considering selling off the portfolio, according to a recent story in the Wall Street Journal. Blackstone’s official line is that no deal is close to being completed. However, a potential sale has a strong logic to it. After all, Blackstone always planned to sell the properties eventually, and prices are now very strong in these core office markets.

“We are not in the business of holding properties for perpetuity,” says Peter Rose, spokesperson for Blackstone. Blackstone typically holds the properties in its 10-year real estate funds for five to seven years. When the properties are sold, the proceeds are returned to the investors. Also, prices are now strong for office properties in strong locations.

Since 2011, Blackstone has disposed of 19 office properties in the portfolio, including several sales in the San Francisco Bay Area market.

It still owns more than 100 buildings containing more than 50 million sq. ft. of space. The portfolio may be worth more than $20 billion.

Prices have almost recovered for office properties in the central business districts of major markets, according to data firm Real Capital Analytics. Average prices are down just 5.2 percent for these properties from the market peak, near the time when Blackstone bought most of its portfolio. Properties in these core markets have benefitted both from a slow recovery in the demand for office space and a reputation as a relatively very safe long-term investment.

“Given the location, no matter what happened to the market there would be demand for these properties,” says Ben Thypin, researcher for data firm Real Capital Analytics.

In contrast, suburban office properties still have room to potentially increase prices. Average prices are still down by more than a third for suburban properties. Prices are down 34 percent for suburban properties in major markets and down 36.7 percent for suburban properties in non-major markets.

With this upside in mind, since 2011 Blackstone has discovered a new frontier: aging suburban office properties. “Last year they bought a lot of suburban office properties in secondary markets—like the Southeast and the Midwest,” says Thypin. For example, in December 2011, Blackstone paid $1.06 billion for a portfolio of 80 mostly class-B office properties totaling 10.3 million sq. ft. in these suburban markets.

Close to the finish line

Blackstone wouldn’t need much to declare victory on its portfolio of office properties in core markets. “They’ve already sold a lot of this portfolio for more than they paid for the properties,” says Thypin.

Blackstone funds bought the properties mostly in three transactions in 2006 and 2007, totaling about $48 billion. That includes the leveraged buyout of Equity Office Properties Trust for $39 billion. Blackstone sold many of the properties almost immediately, bringing in $36 billion.

So to break even, Blackstone just needs to raise roughly $12 billion on the sale of the remaining properties.

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