Real Estate Recovery Underway Despite Rate Challenges

In Brief: Kathleen McCarthy, Blackstone's Global Co-Head of Real Estate, spoke with CNBC's "Closing Bell Overtime" about real estate market dynamics, investment strategies, and sector-specific opportunities, offering a notably optimistic outlook despite current market headwinds.

Big Picture Drivers:

• Rates Impact: Despite higher 10-year Treasury yields, McCarthy sees borrowing costs down 40% year-over-year due to tighter spreads and improved capital market conditions

• Supply Constraints: Significant reduction in new construction across sectors, with logistics down 75% and housing down 60%, creating favorable supply-demand dynamics

• Capital Flow: CMBS issuance tripled in 2024 compared to previous year, with banks becoming more active in real estate lending

Key Topics Covered:

• Market Recovery: McCarthy emphasized real estate is on a "road to recovery" though acknowledging the path won't be smooth

• Office Evolution: Focus on Class A properties in prime locations like Manhattan's Park Avenue, where vacancy rates have dropped to mid-single digits

• Strategic Sectors: Detailed expansion in grocery-anchored retail and significant growth in data center investments, highlighting $80 billion current portfolio with $120 billion pipeline

By The Numbers:

• Portfolio Scale: Blackstone manages $600 billion in real estate assets across their ecosystem

• Data Center Growth: Company grew their data center footprint 8x since 2021 TTS/Bereet acquisition

• Deal Size: Recently completed $4 billion ROIC retail acquisition focusing on grocery-anchored centers

Memorable Quotes:

• "This road to recovery was never promised to be smooth" - McCarthy on market challenges

• "You can continue to have great performance in real estate in a higher rate environment provided that you have cash flow growth"

The Wrap: McCarthy's measured optimism, backed by specific data points and strategic shifts in portfolio allocation, suggests real estate markets are adapting to a new normal of higher rates through disciplined supply and strategic positioning in growth sectors like data centers and essential retail.