Corporate landlords like Blackstone are riding this inflationary wave all the way to the bank

The landlord of this rental home, Blackstone, Inc. definitely doesn’t live on-site.
The landlord of this rental home, Blackstone, Inc. definitely doesn’t live on-site.
Image: REUTERS/Mike Blake
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Blackstone, one of the biggest corporate landlords in the US, reported its highest earnings year on record on Jan. 27,  largely on the strength of rising rents in its real estate portfolio. Blackstone reported $1.4 billion in net income in the fourth quarter, and $5.9 billion for the year, nearly six times what they made the previous year.

That premium reflects the changing ways Americans live, work, and shop during the pandemic. Since 2019, more Americans have been looking for larger homes and buying more online. That’s spurred demand for warehouses and logistics facilities, as well as put pressure on residential rents.

Institutional investors like Blackstone, now valued $84 billion, have ratcheted up their assets in the sector. Much of Blackstone’s recent growth has been driven by the firm’s real estate holdings from residential to commercial buildings, especially warehouses.

On the Jan. 27 call with investors, Blackstone’s executives explained rents for real estate sectors in their portfolio had risen as much as two to three times faster than the overall inflation rate. Relatively short leases on their properties have allowed them to raise prices quickly, capturing more value from renters, even as the inflation rate in the US economy topped 7%. Blackstone’s property portfolio includes everything from massive data centers and industrial warehouses to apartments and single-family homes, mostly throughout the southern and western US.  It’s leading a wave of institutional investors buying up homes in the suburbs.

The US saw significant, rapid rent increases in 2021 driven by surges in demand set off by the pandemic. In some cities, median asking rents went up 30% or more within the year.  That has put pressure on some individual renters struggling to afford rent hikes, but it’s helped bring in massive profits for corporate landlords like Blackstone that own the real estate.

In remarks during the shareholders call on Jan. 27, Blackstone president and COO Jonathan Gray said, “In my 30-year career, I’ve never seen real estate fundamentals in the sectors where we are focused as strong as they are today.” 

Blackstone’s banner year

Real estate has become Blackstone’s most lucrative business. Led by its Blackstone Real Estate Investment Trust, the firm owns more than 3,000 properties, including some 950 million square feet of logistics real estate space. 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 have paid off—nearly half of Blackstone’s earnings for the year came from real estate, the most of any one sector. In buying strategically in rental housing and logistics in particular, Blackstone has set itself up to dominate in two areas that have seen rapidly-growing demand; logistics companies like Amazon hunger for more space to expand e-commerce supply chains, and American families looking for single-family homes but unable to buy. A September 2021 report of Blackstone’s real estate holdings 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 rising, the inventory is not. New home construction has lagged behind population growth for years in the US. The construction industry has been hampered by labor shortages, material cost increases, and delays during the pandemic. The insufficient supply of affordable for-sale housing pushes more people into the rental market, keeping demand high.

Rental prices, especially for units with two bedrooms or more, soared in 2021. The latest national rent report from online rental platform Apartment List found rents rose 18% last year. The pandemic also set off huge swings in demand in rental markets, as people initially left cities en masse and rents decreased, then returned, creating a new wave of demand.

Much of this increase can be attributed to consumer price inflation as the US economy recovers from the impacts of the pandemic. As inflation rises and demand for rentals stays high, property owners are incentivized to raise rents. Commercial landlords like Blackstone have the opportunity to do so when leases turn over quickly, raising the value of what Gray called “short-duration hard assets.”

It’s possible these conditions will change. The Federal Reserve is expected to raise interest rates as expected in 2022 helping curb inflation and cool off the rental market benefiting landlords.