Blackstone is Retooling its Real Estate Investment Strategy

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It’s Hot AI Summer, and the FOMO is infecting nearly every industry — even if they seem entirely unrelated, like real estate.

For the Blackstone Real Estate Income Trust, or Breit, that means resorts and casinos are out, and data centers are in, according to an analysis published Sunday by the Financial Times.

Virtual Realty

While not entirely a black mark for private-equity king Blackstone, Breit’s massive investment in commercial real estate over the past couple of years already needs retooling. From the start of 2021 through the third quarter of 2022, the fund acquired roughly $60 billion in property, the FT said. Then, amid a widespread downturn and recession fears, the firm limited withdrawal and redemption requests from anxious wealthy investors looking to cash out — even though Blackstone said in a letter that Breit held “virtually no” exposure to the market’s trouble spots, like office space.

To generate liquidity to satisfy redemption requests, Breit completed a series of successful high-profile sell-offs, including its stakes in Las Vegas casinos Mandalay Bay and the MGM Grand, as well as an $800 million sale of a Texas resort and a $2.2 billion sale of a slew of self-storage facilities. In sum, the firm has sold roughly $10 billion in assets since the fall of last year, creating about $2.5 billion in investment gains. Now Blackstone is using some of those gains to gear toward a more future-looking version of real estate investment:

  • The firm plans to spend up to $8 billion to build new data centers for tech giants, sources told the FT. Its investments will be made via the QTS Realty Trust, a data center-focused trust it acquired for $10 billion in 2021.
  • QTS’s valuation has leaped to around $20 billion and its total leased space has tripled since the acquisition, sources told the FT, and now Blackstone plans to at least double its size again.

“Large technology companies are in the midst of an AI arms race which we believe will be a once-in-a-generation engine for future growth in data centers and is driving tremendous demand on the ground,” Breit recently told investors. The drive to bolster digital infrastructure will foster a roughly $1 trillion data center market in coming years, according to Dell’Oro Group, an independent research firm.

Sovereign Power: While the AI arms race is the driving force of the data center boom, policy decisions, too, are exacerbating demand. Specifically, increased calls for “data sovereignty” — aka, laws dictating that data be stored in the country it is collected from — is fueling data center demand, especially in the data-conscious EU, according to another FT report. Blackstone may be exiting the Vegas casino game, but “What Happens in AI, Stays in AI” just doesn’t have the same ring to it.