THE LEHMAN CHRONICLES: As the industry’s most influential players look back at the collapse of Lehman Brothers and the lessons that can be learnt from it, Ken Caplan, global co-head of Blackstone Real Estate, highlights real estate’s weak areas and where there is opportunity for growth
Looking back
Did you sense there was a crash coming?
We didn’t anticipate the crash, but we did recognise that private market values were high. We were also seeing excesses in supply and capital markets. In the years leading up to the GFC, we focused on public companies with high quality businesses and real estate where the underlying real estate was more attractively priced than in the private markets. We also sold more than $60 billion of real estate between 2005-2007.
What are your abiding memories of the time around the collapse of Lehman itself?
My strongest memories are around Hilton which we acquired in 2007. This was the largest investment our firm had ever made, and failure was not an option.
We focused on improving operations, growing the business and making sure we could make it to the other side.
Despite lots of negative commentary at the time, we were ultimately vindicated. We exited the last of our Hilton stock earlier this year and it’s reported to have been the most profitable real estate private equity deal ever with $14bn of profit and three times our invested equity.
How has it shaped things for you since?
There were lots of lessons learned from the GFC. It is important to remain a disciplined buyer and seller. This has served us well for 27 years.
I don’t see a near-term crash as we continue to see positive economic growth and job creation.
Also, if you buy a good business or good real estate at a reasonable price with a robust capital structure and adequate reserves, you can do well even through a downturn. You also need to be ready and willing to act when a downturn occurs.
Looking forward
What do you think is the likelihood of another crash in the short to medium term (and why)?
I don’t see a near-term crash as we continue to see positive economic growth and job creation. We also don’t see the same supply and capital market excesses as we did in 2007.
That said, we don’t expect the same overall value appreciation going forward as we’ve seen over the past several years with rising interest rates and already low cap rates. That is why we believe it is not a time to buy the index and it is important to be focused on opportunities where we see the strongest fundamentals and growth prospects.
One of the reasons we remain enthusiastic in the current environment is that we are seeing a greater range of performance due to disruption and changes in how and where people work, live and shop.
What things should investors look out for that might signal another crash?
Some indicators would be capital market exuberance, excess new supply and slowing economic growth. Independent of a crash or downturn, I expect we’ll continue to see a range of performance across geography and asset classes as we are seeing a lot of innovation and disruption impacting real estate.
What sector or geography do you think looks most susceptible to a downturn?
We are most cautious on sectors and geographies where we see weaker demand and growth prospects, along with areas with excess supply.
We are also less excited about net leased assets that are more bond-like given the prospect of higher interest rates. One of the reasons we remain enthusiastic in the current environment is that we are seeing a greater range of performance due to disruption and changes in how and where people work, live and shop.
If you look at our recent investment activity, it has been concentrated in areas that are benefiting from these changes and where we see stronger demand and fundamentals. This includes logistics which has been our number one theme for several years, residential real estate and cities with stronger economic/job growth.
