Speaker 1: Bloomberg Audio Studios, podcasts, radio News.
Speaker 2: I want to start off here with a specific part
Speaker 2: of your business, with the real estate business, because if
Speaker 2: you looked across a business, that was really the one
Speaker 2: place that a scarcity of exit activity really weighed on
Speaker 2: fee related earnings. Ultimately, the big question is what is
Speaker 2: it going to take for exits to start rebounding in
Speaker 2: the property sector.
Speaker 3: Well, Shanali, it is great to be with you. Just
Speaker 3: quickly on the quarter. We think it was another strong
Speaker 3: quarter because the forward indicators for the business were so positive.
Speaker 1: We were super active deploying.
Speaker 3: Capital in the quarter fifty three billion dollars invested or committed,
Speaker 3: which is the busiest quarter for us in two years,
Speaker 3: and we raised nearly forty billion dollars. What I would
Speaker 3: say as it relates to the property sector, you know,
Speaker 3: healing of a market that's been under pressure takes a
Speaker 3: bit of time. As you'll recall back at the beginning
Speaker 3: of the year on our Q four earnings call, and
Speaker 3: I think on your program, I said that I thought
Speaker 3: real estate was bottoming and that we would deploy a
Speaker 3: bunch of capital, and that's exactly what happened.
Speaker 1: What we've seen in the Green Street.
Speaker 3: Property Report is that asset values have basically bottomed, they've
Speaker 3: begun to rise a little bit. We've also went out
Speaker 3: and deployed more than fifteen billion dollars in real estate,
Speaker 3: and so we're in that process that feels like the
Speaker 3: global financial crisis. I would say as an exception, by
Speaker 3: the way, the office market is going to take longer
Speaker 3: to heal because of the big vacancies. But if you
Speaker 3: went back then, what we saw was we deployed a
Speaker 3: lot of capital after the crisis, and then markets start
Speaker 3: to come back and you acx it. So it takes
Speaker 3: a little bit of time, but certainly cost of capital
Speaker 3: coming down. Borrowing costs have come down a bunch in
Speaker 3: real estate. If you were borrowing back in the fall,
Speaker 3: what it cost you maybe eight percent for real estate
Speaker 3: loan today maybe less than six percent. Ten year treasuries
Speaker 3: have come down, the CMBs markets reopened, So we just
Speaker 3: view this as a process. It takes a bit of time,
Speaker 3: but the healing has begun and with that you'll see
Speaker 3: more transaction activity certainly as you get later in this
Speaker 3: year and into next year. So it doesn't happen overnight,
Speaker 3: but there are some positive signs for sure.
Speaker 2: How do you think about this as it relates to
Speaker 2: interest rates? Obviously the market is still expecting one, if
Speaker 2: not two rate cuts this year. How would that start
Speaker 2: to unlock activity? And do you even think we get that.
Speaker 1: Well? I think the FEDS medicine is working.
Speaker 3: I think when we look at our portfolio companies every
Speaker 3: quarter we have several hundred of them, we ask them
Speaker 3: questions like how difficult is it to hire workers? And
Speaker 3: this quarter in Q two they said it was the
Speaker 3: least difficult it's been since the first quarter of twenty
Speaker 3: two twenty one, So the labor market is cooling. We
Speaker 3: asked about what do you think wages are going to
Speaker 3: be a year from today, and the CEO said they
Speaker 3: think it'll be up three and a quarter percent. That's
Speaker 3: the lowest prediction from them that again, we've had in
Speaker 3: a number of years.
Speaker 1: That's very positive.
Speaker 3: And then when you look at shelter costs, which are
Speaker 3: the biggest component of CPI, the data we see on
Speaker 3: the ground with apartment or single family rents are materially
Speaker 3: lower than what's in the government data, so that should
Speaker 3: come down.
Speaker 1: So it won't happen.
Speaker 3: Necessarily in a straight line, but I think there are
Speaker 3: a lot of things pointing to the FED being effective here,
Speaker 3: that inflation's coming down and that will give them air
Speaker 3: cover to cut once or twice this year.
Speaker 1: And for markets it's very helpful. As you know, when
Speaker 1: you're raising the.
Speaker 3: Cost to capital and they took cost to capital from
Speaker 3: zero to five and a half percent, that really impacts markets.
Speaker 3: That's beginning to change, and that's the reason why the
Speaker 3: bank CEOs have been on the last week talking about
Speaker 3: healthier capital markets. The early stage of this recovery in
Speaker 3: capital markets. That's obviously quite positive for our business.
Speaker 2: John, When you think about the second half of the year,
Speaker 2: it's interesting the second quarter you are on track here,
Speaker 2: you increase your pace of investing to the point that
Speaker 2: you reach the highest levels in two years. But what
Speaker 2: does the second half bring with so much political and
Speaker 2: geopolitical risk.
Speaker 3: You know, we tend not to focus on those things
Speaker 3: in the short term because we want to be long
Speaker 3: term investors, and so if there's uncertainty in the world
Speaker 3: and it results in better opportunity to invest capital, that's
Speaker 3: what we want to do. I mean, part of the
Speaker 3: reason you see us deploying this much capital is because
Speaker 3: we're investing here sort of ahead of that all clear
Speaker 3: sign before rates come down. And so when I look
Speaker 3: at our deal pipeline, be it in private equity, real estate,
Speaker 3: our growth business, infrastructure, secondaries.
Speaker 1: It's picking up.
Speaker 3: I talked about last quarter a bit of the briefcase indicator,
Speaker 3: and every weekend looking at the Investment Committee memos, they
Speaker 3: continue to be coming. It feels like deal activity will
Speaker 3: pick up, not as surprise as the equity markets are stronger,
Speaker 3: debt costs, the capitals come down, so I think it
Speaker 3: will be a pretty good environment.
Speaker 1: It'll continue to get better.
Speaker 3: Inflation coming down is just so important to help really
Speaker 3: grease the system and have transaction activity pick up.
Speaker 2: Beyond the macro story here, there's a lot of political
Speaker 2: rhetoric out there that could significantly impact your business, starting
Speaker 2: with the rent caps proposed by the Biden and administration
Speaker 2: in recent days. How do you see that as impacting
Speaker 2: the property market if that were to come to light.
Speaker 3: Well, I think getting support for something like that at
Speaker 3: the federal level would not be easy. And the reason
Speaker 3: is because these policies of rent regulation unfortunately have not
Speaker 3: been successful. We should start by saying there is a
Speaker 3: housing affordability crisis in the country, and I understand why
Speaker 3: elected officials want to try to do something. The challenge is,
Speaker 3: if you have a shortage of something and you decide
Speaker 3: to freeze the price of it, it doesn't solve the
Speaker 3: underlying problem. If you look in New York and San Francisco,
Speaker 3: where we've had rent control for decades, those are the
Speaker 3: places that have the most acute shortage of housing. Because
Speaker 3: once you freeze the price of it, you tend to
Speaker 3: get a lot less supply. People invest a lot less
Speaker 3: in the existing property stock also, and so what's the challenge.
Speaker 3: The challenge is, we are not building enough homes. If
Speaker 3: you went back to when they first started collecting data
Speaker 3: on housing construction in nineteen fifty nine, we were building
Speaker 3: twenty percent more housing than we are today. Back then,
Speaker 3: the US population was about half of what it is today.
Speaker 3: And this has really been the story since the financial crisis.
Speaker 3: So we need to look at at zoning regulation, density costs.
Speaker 3: We need to do everything possible to stimulate new supply,
Speaker 3: and unfortunately, if you try to freeze the price of housing,
Speaker 3: you're going to get the exact opposite. That's what happened
Speaker 3: in a few cities it's certainly what's happened in European
Speaker 3: cities with rent regulation. I understand the goal. I just
Speaker 3: think the way to get there is very different.
Speaker 2: Well, what is the way to get there? Isn't the
Speaker 2: rent still too damn high and it's becoming a bipartis
Speaker 2: an issue? Really? Even Jdvans brought it up during the
Speaker 2: course of the Republican National Convention. What would be fixed?
Speaker 1: The fix is more supply.
Speaker 3: You know, that's the way the capitalistic system works. If
Speaker 3: we delivered a lot more homes. You know, you look
Speaker 3: at housing construction in California relative to Texas, and you
Speaker 3: see what happens when you can add more supply more reasonably.
Speaker 3: I think we really need to look at the state, city,
Speaker 3: federal level on how to incentivize new construction. How do
Speaker 3: we make that a nash goal so more people have
Speaker 3: a shot to buy homes? There are more apartments being built.
Speaker 3: You know, we've seen in the apartment market in the
Speaker 3: US this year because a bunch of new supply has
Speaker 3: come on. You know, rental growth has been much lower
Speaker 3: than it's been in past years, below inflationary levels. Supply
Speaker 3: demand works. We just need more supply of housing. I
Speaker 3: think if if we make it a goal to add
Speaker 3: more supply, that'll happen.
Speaker 1: You know.
Speaker 2: Beyond the rent story, there's also a large story around trade,
Speaker 2: both coming out of the Biden White House as well
Speaker 2: as tariffs being talked about under a potential Trump administration
Speaker 2: in the future. How would that start to impact business,
Speaker 2: particularly in the way just yesterday, John, you saw AI
Speaker 2: related stocks sell off on the prospect of tougher restrictions
Speaker 2: on Chinese chips. You were very, very much invested in
Speaker 2: the AI story these days.
Speaker 3: Well, I would say in terms of trade overall, if
Speaker 3: we ended up with with a red sweep, we could
Speaker 3: see some significant changes. And you have to think about
Speaker 3: that when you're invested in manufacturing as it relates to chips.
Speaker 3: I think the one thing all parties agree on is
Speaker 3: innovation is at the heart of America and our economic
Speaker 3: growth story. So if things happen around chips with Taiwan,
Speaker 3: I think elected officials will keep that in mind.
Speaker 1: They understand that we need to innovate.
Speaker 3: Obviously we need access to the most advanced chips. What's
Speaker 3: happening in AI data centers a huge area of focus,
Speaker 3: perhaps our biggest area of focus at the firm that
Speaker 3: is paid off in an enormous way. Obviously chips are
Speaker 3: at the heart of that.
Speaker 1: So my guess is.
Speaker 3: There will be toing and froing, but ultimately US companies
Speaker 3: will have access to chips.
Speaker 2: John, a personal question for you. I know there are
Speaker 2: different politics inside of Blackstone, of course, but you yourself
Speaker 2: have been a large Democratic donor, have supported supported President
Speaker 2: Joe Biden in the past. There are now increasing calls
Speaker 2: for him to step down from the presidential race and
Speaker 2: the Batona perhaps, how do you feel.
Speaker 3: Well, the president is a good man, he has been
Speaker 3: a wonderful public servant, and like Speaker Pelosi said, you know,
Speaker 3: he's gotten the votes in the Democratic primary. This is
Speaker 3: his decision, but I would hope he considers the really
Speaker 3: extreme physical toll of this business, of this job, I
Speaker 3: should say, over the next four and a half years.
Speaker 3: And so again, his call, but it is a very
Speaker 3: challenging physical job.
Speaker 2: Are you looking to support Kamala Harris instead?
Speaker 3: You know, I'm going to wait and see what happens
Speaker 3: here on the Democratic side. I am a Democrat, but
Speaker 3: I'm going to let the process play out.
Speaker 2: If Trump were to take the office after the November election.
Speaker 2: What would be the biggest change you think to the
Speaker 2: economy and markets.
Speaker 1: Well, I think there be a couple of them.
Speaker 3: Regulatory change could be pretty significant, particularly in the area
Speaker 3: of m and A and antitrust, which has made deal
Speaker 3: making a bit more challenging. I think on the energy side,
Speaker 3: the approach towards hydrocarbons and drilling would change pretty significantly.
Speaker 3: I still think renewables are a key part of the mix.
Speaker 3: We've got a real need for power.
Speaker 1: If you think about it.
Speaker 3: In this country, power demand the last decade or so
Speaker 3: has been flat. It's now projected to be up forty percent.
Speaker 3: Part of that is digital infrastructure. Part of that is
Speaker 3: this manufacturing resurgence that we've seen. So I think we'll
Speaker 3: see a change in energy policy. And then you talked
Speaker 3: about it, we could see a different environment for tariffs.
Speaker 2: You know, if you think about the election cycle and
Speaker 2: what we have seen so far, do you have any
Speaker 2: concerns as a business leader about unrest in this country?
Speaker 3: You know, I have a lot of confidence in this country.
Speaker 3: We have an incredible Madisonian system. We have so many
Speaker 3: patriotic people on who are Republicans or independents or democrats.
Speaker 3: I think most people want to see economic prosperity, want
Speaker 3: their children to have better lives, want the country to
Speaker 3: be safe and secure.
Speaker 1: There to be freedoms.
Speaker 3: I really believe ultimately, even though there's a lot more
Speaker 3: friction social media I think makes it tougher, I actually
Speaker 3: think people's goals are similar, and I think we'll find
Speaker 3: a way to get through this.
Speaker 1: The events of the last couple of weeks.
Speaker 3: Particularly the assassination attempt, was very disturbing. There's no place
Speaker 3: for that in our country, and I really think we'll
Speaker 3: find a way to move forward. I have a lot
Speaker 3: of confidence in this country, and I know our firm
Speaker 3: does as well.
Speaker 2: You know, since so much of the business rebound has
Speaker 2: been predicated on this idea of lower interest rates, do
Speaker 2: you worry about what the picture could look like going
Speaker 2: into twenty twenty five, especially with so many prominent economists
Speaker 2: warning that a teriff strategy or tax cuts or further
Speaker 2: tax cuts rather could lead to more inflation. Do you
Speaker 2: worry that the inflationary or disinflationary story could be interrupted?
Speaker 3: Well, I think it's legitimate to be concerned about what
Speaker 3: happens with deficits over time. By the way, I view
Speaker 3: it as a bipartisan issue. Both sides have had their
Speaker 3: hand at this. I think it will require a bipartisan
Speaker 3: solution as well. I don't know if that'll happen in
Speaker 3: twenty twenty five, but I think long term is a
Speaker 3: country finding solutions to get us back to a better
Speaker 3: fiscal path That makes a lot of sense, and so
Speaker 3: I think it's worth looking at how can we get
Speaker 3: the growth and the debt to come down so it's
Speaker 3: manageable long term, so it doesn't eat up too much
Speaker 3: of our budget. I think that should be a goal
Speaker 3: of this country. There's so many positive things that are
Speaker 3: happening in terms of innovation. I think it's one area
Speaker 3: we've got to focus on. But I think near term
Speaker 3: it's going to be more about the disinflation that's probably
Speaker 3: going to drive the ten year treasury as versus let's
Speaker 3: say the technical supply issues.
Speaker 2: Biggest risk going into the end of year, given that
Speaker 2: you're so positive about their direction of travel.
Speaker 3: Well, I think the biggest risk is as rates are
Speaker 3: at this very elevated level, we see further slowdowns. We've
Speaker 3: seen unemployment move from three point four to four point one.
Speaker 3: You know, as companies see deceleration in their businesses, they
Speaker 3: could get more cautious. You could see more job losses,
Speaker 3: and you could see a slow down in economic growth
Speaker 3: that's greater than most people are anticipating.
Speaker 1: That would be the risk.
Speaker 3: So far, now it feels like we're on this softer
Speaker 3: landing path and that the FED is going to move
Speaker 3: to start to cut rates and hopefully they can bring
Speaker 3: inflation down. Unemployment will maybe go up a bit more,
Speaker 3: but modestly, and we'll power through this. That would be
Speaker 3: the hope, but the risk would be that we slow
Speaker 3: more than expected.