Which Investors Is The Question

Implications: The Zell money is assured of a reasonable profit at the close of the transaction.  Blackstone’s investors are a lot less certain to profit.  The buy is huge and comes after a long expansion of the economy.  The exit price here will depend on increases in rents.  You’ll need a similarly large buyer to take down the entire portfolio once again in one piece, or a huge public offering if the real estate bull markets continues.  Even if it’s divided up into regional groups or even down to the individual properties for disposition, it’s still a tremendous undertaking. 

I believe it’s too late for Blackstone to reap the best returns.  The next owner(s) will do well if they get an opportunity price and probably suffer if they give Blackstone a reasonable profit or better.

Analysis:

This is a simplistic view of a transaction with probably every moving part ever devised by the real estate industry.  But it usually boils down to whether you are in the right place at the right time with the right product at the right price.  I think Blackstone’s got two out of the four right.  The other factors are going to slow them down, however.  They’re not at the right price at the right time.

What they’re going to have to do is get these properties performing individually better so they can come back at the end of the day/exit having performed better than the competitors.  This is unfortunately not the way with the usual institutional portfolio management system nor do I think that Blackstone’s ever done it before either.  The organizational culture is going to have to be changed so that increased at-the-market-or-above rents will have value to the tenants.  It’s not impossible, but it is a challenge – in fact one of the biggest real estate challenges ever undertaken.