WEBVTT - Blackstone COO Jon Gray Talks Second Quarter Earnings 0:00:02.600 --> 0:00:07.000 Bloomberg Audio Studios, podcasts, radio News. 0:00:07.640 --> 0:00:10.480 I want to start off here with a specific part 0:00:10.520 --> 0:00:12.960 of your business, with the real estate business, because if 0:00:13.000 --> 0:00:15.720 you looked across a business, that was really the one 0:00:15.840 --> 0:00:19.800 place that a scarcity of exit activity really weighed on 0:00:20.000 --> 0:00:23.560 fee related earnings. Ultimately, the big question is what is 0:00:23.600 --> 0:00:26.279 it going to take for exits to start rebounding in 0:00:26.320 --> 0:00:27.200 the property sector. 0:00:29.000 --> 0:00:31.760 Well, Shanali, it is great to be with you. Just 0:00:31.920 --> 0:00:35.360 quickly on the quarter. We think it was another strong 0:00:35.479 --> 0:00:39.960 quarter because the forward indicators for the business were so positive. 0:00:40.640 --> 0:00:42.880 We were super active deploying. 0:00:42.479 --> 0:00:47.959 Capital in the quarter fifty three billion dollars invested or committed, 0:00:48.440 --> 0:00:50.800 which is the busiest quarter for us in two years, 0:00:50.800 --> 0:00:54.720 and we raised nearly forty billion dollars. What I would 0:00:54.720 --> 0:00:57.760 say as it relates to the property sector, you know, 0:00:58.040 --> 0:01:01.560 healing of a market that's been under pressure takes a 0:01:01.600 --> 0:01:04.800 bit of time. As you'll recall back at the beginning 0:01:04.840 --> 0:01:06.920 of the year on our Q four earnings call, and 0:01:06.959 --> 0:01:09.800 I think on your program, I said that I thought 0:01:09.800 --> 0:01:13.440 real estate was bottoming and that we would deploy a 0:01:13.440 --> 0:01:16.360 bunch of capital, and that's exactly what happened. 0:01:16.440 --> 0:01:18.920 What we've seen in the Green Street. 0:01:19.000 --> 0:01:23.320 Property Report is that asset values have basically bottomed, they've 0:01:23.319 --> 0:01:26.920 begun to rise a little bit. We've also went out 0:01:26.959 --> 0:01:30.520 and deployed more than fifteen billion dollars in real estate, 0:01:30.959 --> 0:01:33.640 and so we're in that process that feels like the 0:01:33.720 --> 0:01:37.679 global financial crisis. I would say as an exception, by 0:01:37.680 --> 0:01:40.120 the way, the office market is going to take longer 0:01:40.160 --> 0:01:43.080 to heal because of the big vacancies. But if you 0:01:43.120 --> 0:01:46.560 went back then, what we saw was we deployed a 0:01:46.560 --> 0:01:49.840 lot of capital after the crisis, and then markets start 0:01:49.880 --> 0:01:52.200 to come back and you acx it. So it takes 0:01:52.240 --> 0:01:55.320 a little bit of time, but certainly cost of capital 0:01:55.400 --> 0:01:59.160 coming down. Borrowing costs have come down a bunch in 0:01:59.200 --> 0:02:02.200 real estate. If you were borrowing back in the fall, 0:02:02.400 --> 0:02:05.200 what it cost you maybe eight percent for real estate 0:02:05.240 --> 0:02:09.600 loan today maybe less than six percent. Ten year treasuries 0:02:09.639 --> 0:02:13.040 have come down, the CMBs markets reopened, So we just 0:02:13.160 --> 0:02:15.680 view this as a process. It takes a bit of time, 0:02:15.919 --> 0:02:19.040 but the healing has begun and with that you'll see 0:02:19.080 --> 0:02:22.200 more transaction activity certainly as you get later in this 0:02:22.320 --> 0:02:25.519 year and into next year. So it doesn't happen overnight, 0:02:25.560 --> 0:02:27.560 but there are some positive signs for sure. 0:02:27.760 --> 0:02:29.520 How do you think about this as it relates to 0:02:29.560 --> 0:02:32.760 interest rates? Obviously the market is still expecting one, if 0:02:32.800 --> 0:02:35.800 not two rate cuts this year. How would that start 0:02:35.840 --> 0:02:38.520 to unlock activity? And do you even think we get that. 0:02:40.360 --> 0:02:42.840 Well? I think the FEDS medicine is working. 0:02:43.000 --> 0:02:46.680 I think when we look at our portfolio companies every 0:02:46.760 --> 0:02:49.200 quarter we have several hundred of them, we ask them 0:02:49.280 --> 0:02:53.160 questions like how difficult is it to hire workers? And 0:02:53.480 --> 0:02:56.560 this quarter in Q two they said it was the 0:02:56.639 --> 0:02:59.760 least difficult it's been since the first quarter of twenty 0:02:59.800 --> 0:03:03.200 two twenty one, So the labor market is cooling. We 0:03:03.240 --> 0:03:05.320 asked about what do you think wages are going to 0:03:05.320 --> 0:03:08.360 be a year from today, and the CEO said they 0:03:08.360 --> 0:03:10.880 think it'll be up three and a quarter percent. That's 0:03:10.880 --> 0:03:13.920 the lowest prediction from them that again, we've had in 0:03:13.919 --> 0:03:14.720 a number of years. 0:03:14.840 --> 0:03:16.000 That's very positive. 0:03:16.240 --> 0:03:18.919 And then when you look at shelter costs, which are 0:03:18.960 --> 0:03:22.320 the biggest component of CPI, the data we see on 0:03:22.360 --> 0:03:26.000 the ground with apartment or single family rents are materially 0:03:26.080 --> 0:03:28.960 lower than what's in the government data, so that should 0:03:28.960 --> 0:03:29.520 come down. 0:03:29.639 --> 0:03:31.440 So it won't happen. 0:03:31.160 --> 0:03:33.760 Necessarily in a straight line, but I think there are 0:03:33.760 --> 0:03:36.720 a lot of things pointing to the FED being effective here, 0:03:37.240 --> 0:03:40.520 that inflation's coming down and that will give them air 0:03:40.560 --> 0:03:42.920 cover to cut once or twice this year. 0:03:43.240 --> 0:03:46.040 And for markets it's very helpful. As you know, when 0:03:46.080 --> 0:03:46.920 you're raising the. 0:03:46.880 --> 0:03:49.320 Cost to capital and they took cost to capital from 0:03:49.400 --> 0:03:53.640 zero to five and a half percent, that really impacts markets. 0:03:53.920 --> 0:03:56.400 That's beginning to change, and that's the reason why the 0:03:56.440 --> 0:03:59.360 bank CEOs have been on the last week talking about 0:03:59.400 --> 0:04:03.320 healthier capital markets. The early stage of this recovery in 0:04:03.360 --> 0:04:07.080 capital markets. That's obviously quite positive for our business. 0:04:07.360 --> 0:04:09.240 John, When you think about the second half of the year, 0:04:09.320 --> 0:04:13.200 it's interesting the second quarter you are on track here, 0:04:12.960 --> 0:04:15.840 you increase your pace of investing to the point that 0:04:15.880 --> 0:04:18.920 you reach the highest levels in two years. But what 0:04:18.960 --> 0:04:22.280 does the second half bring with so much political and 0:04:22.360 --> 0:04:23.479 geopolitical risk. 0:04:25.279 --> 0:04:28.440 You know, we tend not to focus on those things 0:04:28.480 --> 0:04:31.520 in the short term because we want to be long 0:04:31.600 --> 0:04:34.920 term investors, and so if there's uncertainty in the world 0:04:35.200 --> 0:04:38.880 and it results in better opportunity to invest capital, that's 0:04:38.920 --> 0:04:40.359 what we want to do. I mean, part of the 0:04:40.360 --> 0:04:43.480 reason you see us deploying this much capital is because 0:04:43.520 --> 0:04:46.559 we're investing here sort of ahead of that all clear 0:04:46.640 --> 0:04:50.200 sign before rates come down. And so when I look 0:04:50.200 --> 0:04:54.840 at our deal pipeline, be it in private equity, real estate, 0:04:55.160 --> 0:05:00.160 our growth business, infrastructure, secondaries. 0:04:59.720 --> 0:05:00.600 It's picking up. 0:05:00.880 --> 0:05:04.080 I talked about last quarter a bit of the briefcase indicator, 0:05:04.480 --> 0:05:07.840 and every weekend looking at the Investment Committee memos, they 0:05:08.000 --> 0:05:11.320 continue to be coming. It feels like deal activity will 0:05:11.360 --> 0:05:15.160 pick up, not as surprise as the equity markets are stronger, 0:05:15.240 --> 0:05:18.560 debt costs, the capitals come down, so I think it 0:05:18.640 --> 0:05:21.080 will be a pretty good environment. 0:05:21.120 --> 0:05:22.440 It'll continue to get better. 0:05:22.920 --> 0:05:26.440 Inflation coming down is just so important to help really 0:05:26.520 --> 0:05:29.640 grease the system and have transaction activity pick up. 0:05:30.839 --> 0:05:33.680 Beyond the macro story here, there's a lot of political 0:05:33.800 --> 0:05:37.880 rhetoric out there that could significantly impact your business, starting 0:05:37.920 --> 0:05:40.960 with the rent caps proposed by the Biden and administration 0:05:41.080 --> 0:05:44.280 in recent days. How do you see that as impacting 0:05:44.320 --> 0:05:46.360 the property market if that were to come to light. 0:05:48.240 --> 0:05:51.040 Well, I think getting support for something like that at 0:05:51.080 --> 0:05:55.280 the federal level would not be easy. And the reason 0:05:55.440 --> 0:05:59.160 is because these policies of rent regulation unfortunately have not 0:05:59.200 --> 0:06:02.279 been successful. We should start by saying there is a 0:06:02.360 --> 0:06:06.920 housing affordability crisis in the country, and I understand why 0:06:07.320 --> 0:06:10.560 elected officials want to try to do something. The challenge is, 0:06:11.040 --> 0:06:14.480 if you have a shortage of something and you decide 0:06:14.520 --> 0:06:17.359 to freeze the price of it, it doesn't solve the 0:06:17.440 --> 0:06:21.240 underlying problem. If you look in New York and San Francisco, 0:06:21.360 --> 0:06:25.000 where we've had rent control for decades, those are the 0:06:25.040 --> 0:06:28.719 places that have the most acute shortage of housing. Because 0:06:28.720 --> 0:06:30.960 once you freeze the price of it, you tend to 0:06:30.960 --> 0:06:34.360 get a lot less supply. People invest a lot less 0:06:34.480 --> 0:06:39.240 in the existing property stock also, and so what's the challenge. 0:06:39.279 --> 0:06:42.240 The challenge is, we are not building enough homes. If 0:06:42.240 --> 0:06:44.719 you went back to when they first started collecting data 0:06:44.720 --> 0:06:48.320 on housing construction in nineteen fifty nine, we were building 0:06:48.440 --> 0:06:52.200 twenty percent more housing than we are today. Back then, 0:06:52.240 --> 0:06:55.480 the US population was about half of what it is today. 0:06:55.839 --> 0:06:58.719 And this has really been the story since the financial crisis. 0:06:58.880 --> 0:07:03.800 So we need to look at at zoning regulation, density costs. 0:07:04.000 --> 0:07:07.440 We need to do everything possible to stimulate new supply, 0:07:07.800 --> 0:07:10.960 and unfortunately, if you try to freeze the price of housing, 0:07:11.160 --> 0:07:13.800 you're going to get the exact opposite. That's what happened 0:07:13.840 --> 0:07:16.240 in a few cities it's certainly what's happened in European 0:07:16.280 --> 0:07:20.480 cities with rent regulation. I understand the goal. I just 0:07:20.520 --> 0:07:22.480 think the way to get there is very different. 0:07:22.640 --> 0:07:24.280 Well, what is the way to get there? Isn't the 0:07:24.360 --> 0:07:27.640 rent still too damn high and it's becoming a bipartis 0:07:27.680 --> 0:07:30.440 an issue? Really? Even Jdvans brought it up during the 0:07:30.480 --> 0:07:33.240 course of the Republican National Convention. What would be fixed? 0:07:34.120 --> 0:07:35.480 The fix is more supply. 0:07:35.880 --> 0:07:39.200 You know, that's the way the capitalistic system works. If 0:07:39.200 --> 0:07:42.119 we delivered a lot more homes. You know, you look 0:07:42.320 --> 0:07:48.120 at housing construction in California relative to Texas, and you 0:07:48.200 --> 0:07:51.400 see what happens when you can add more supply more reasonably. 0:07:51.840 --> 0:07:54.440 I think we really need to look at the state, city, 0:07:54.520 --> 0:07:58.840 federal level on how to incentivize new construction. How do 0:07:58.880 --> 0:08:01.880 we make that a nash goal so more people have 0:08:01.960 --> 0:08:04.920 a shot to buy homes? There are more apartments being built. 0:08:05.200 --> 0:08:07.160 You know, we've seen in the apartment market in the 0:08:07.280 --> 0:08:09.920 US this year because a bunch of new supply has 0:08:10.000 --> 0:08:12.840 come on. You know, rental growth has been much lower 0:08:12.880 --> 0:08:16.840 than it's been in past years, below inflationary levels. Supply 0:08:16.960 --> 0:08:20.240 demand works. We just need more supply of housing. I 0:08:20.280 --> 0:08:22.400 think if if we make it a goal to add 0:08:22.440 --> 0:08:23.880 more supply, that'll happen. 0:08:24.760 --> 0:08:24.960 You know. 0:08:25.160 --> 0:08:29.280 Beyond the rent story, there's also a large story around trade, 0:08:29.280 --> 0:08:32.080 both coming out of the Biden White House as well 0:08:32.160 --> 0:08:36.080 as tariffs being talked about under a potential Trump administration 0:08:36.160 --> 0:08:39.040 in the future. How would that start to impact business, 0:08:39.120 --> 0:08:42.880 particularly in the way just yesterday, John, you saw AI 0:08:43.080 --> 0:08:46.920 related stocks sell off on the prospect of tougher restrictions 0:08:46.920 --> 0:08:49.800 on Chinese chips. You were very, very much invested in 0:08:49.840 --> 0:08:51.160 the AI story these days. 0:08:53.240 --> 0:08:58.839 Well, I would say in terms of trade overall, if 0:08:58.920 --> 0:09:02.679 we ended up with with a red sweep, we could 0:09:02.720 --> 0:09:06.280 see some significant changes. And you have to think about 0:09:06.360 --> 0:09:10.439 that when you're invested in manufacturing as it relates to chips. 0:09:10.760 --> 0:09:13.360 I think the one thing all parties agree on is 0:09:13.520 --> 0:09:16.640 innovation is at the heart of America and our economic 0:09:16.679 --> 0:09:20.800 growth story. So if things happen around chips with Taiwan, 0:09:21.320 --> 0:09:24.120 I think elected officials will keep that in mind. 0:09:24.160 --> 0:09:26.640 They understand that we need to innovate. 0:09:26.800 --> 0:09:30.320 Obviously we need access to the most advanced chips. What's 0:09:30.360 --> 0:09:34.600 happening in AI data centers a huge area of focus, 0:09:34.679 --> 0:09:37.679 perhaps our biggest area of focus at the firm that 0:09:37.800 --> 0:09:41.160 is paid off in an enormous way. Obviously chips are 0:09:41.200 --> 0:09:41.880 at the heart of that. 0:09:42.040 --> 0:09:43.480 So my guess is. 0:09:43.559 --> 0:09:47.280 There will be toing and froing, but ultimately US companies 0:09:47.320 --> 0:09:48.840 will have access to chips. 0:09:49.160 --> 0:09:51.200 John, a personal question for you. I know there are 0:09:51.640 --> 0:09:54.760 different politics inside of Blackstone, of course, but you yourself 0:09:54.800 --> 0:09:59.120 have been a large Democratic donor, have supported supported President 0:09:59.200 --> 0:10:02.120 Joe Biden in the past. There are now increasing calls 0:10:02.160 --> 0:10:05.160 for him to step down from the presidential race and 0:10:05.320 --> 0:10:08.000 the Batona perhaps, how do you feel. 0:10:09.559 --> 0:10:12.640 Well, the president is a good man, he has been 0:10:12.800 --> 0:10:17.480 a wonderful public servant, and like Speaker Pelosi said, you know, 0:10:17.559 --> 0:10:20.520 he's gotten the votes in the Democratic primary. This is 0:10:20.600 --> 0:10:25.120 his decision, but I would hope he considers the really 0:10:25.360 --> 0:10:28.840 extreme physical toll of this business, of this job, I 0:10:28.840 --> 0:10:32.320 should say, over the next four and a half years. 0:10:32.360 --> 0:10:35.320 And so again, his call, but it is a very 0:10:35.440 --> 0:10:36.839 challenging physical job. 0:10:37.160 --> 0:10:39.640 Are you looking to support Kamala Harris instead? 0:10:41.600 --> 0:10:44.280 You know, I'm going to wait and see what happens 0:10:44.320 --> 0:10:47.280 here on the Democratic side. I am a Democrat, but 0:10:47.320 --> 0:10:49.200 I'm going to let the process play out. 0:10:50.000 --> 0:10:53.679 If Trump were to take the office after the November election. 0:10:53.880 --> 0:10:56.120 What would be the biggest change you think to the 0:10:56.200 --> 0:10:57.280 economy and markets. 0:10:59.200 --> 0:11:01.240 Well, I think there be a couple of them. 0:11:01.440 --> 0:11:05.800 Regulatory change could be pretty significant, particularly in the area 0:11:05.800 --> 0:11:09.240 of m and A and antitrust, which has made deal 0:11:09.280 --> 0:11:13.520 making a bit more challenging. I think on the energy side, 0:11:13.920 --> 0:11:18.880 the approach towards hydrocarbons and drilling would change pretty significantly. 0:11:20.120 --> 0:11:22.600 I still think renewables are a key part of the mix. 0:11:22.960 --> 0:11:24.840 We've got a real need for power. 0:11:24.880 --> 0:11:25.600 If you think about it. 0:11:25.640 --> 0:11:28.760 In this country, power demand the last decade or so 0:11:28.880 --> 0:11:32.679 has been flat. It's now projected to be up forty percent. 0:11:33.160 --> 0:11:35.960 Part of that is digital infrastructure. Part of that is 0:11:36.080 --> 0:11:40.559 this manufacturing resurgence that we've seen. So I think we'll 0:11:40.559 --> 0:11:42.720 see a change in energy policy. And then you talked 0:11:42.760 --> 0:11:45.520 about it, we could see a different environment for tariffs. 0:11:46.360 --> 0:11:49.480 You know, if you think about the election cycle and 0:11:49.520 --> 0:11:51.120 what we have seen so far, do you have any 0:11:51.160 --> 0:11:54.080 concerns as a business leader about unrest in this country? 0:11:56.000 --> 0:11:58.439 You know, I have a lot of confidence in this country. 0:11:59.120 --> 0:12:03.240 We have an incredible Madisonian system. We have so many 0:12:03.320 --> 0:12:07.560 patriotic people on who are Republicans or independents or democrats. 0:12:08.000 --> 0:12:11.760 I think most people want to see economic prosperity, want 0:12:11.760 --> 0:12:14.679 their children to have better lives, want the country to 0:12:14.720 --> 0:12:15.840 be safe and secure. 0:12:15.880 --> 0:12:16.880 There to be freedoms. 0:12:17.720 --> 0:12:20.800 I really believe ultimately, even though there's a lot more 0:12:20.960 --> 0:12:25.280 friction social media I think makes it tougher, I actually 0:12:25.360 --> 0:12:28.360 think people's goals are similar, and I think we'll find 0:12:28.400 --> 0:12:29.400 a way to get through this. 0:12:29.800 --> 0:12:31.960 The events of the last couple of weeks. 0:12:31.920 --> 0:12:36.440 Particularly the assassination attempt, was very disturbing. There's no place 0:12:36.480 --> 0:12:39.040 for that in our country, and I really think we'll 0:12:39.040 --> 0:12:40.920 find a way to move forward. I have a lot 0:12:40.920 --> 0:12:43.440 of confidence in this country, and I know our firm 0:12:43.520 --> 0:12:44.200 does as well. 0:12:44.880 --> 0:12:47.240 You know, since so much of the business rebound has 0:12:47.320 --> 0:12:50.480 been predicated on this idea of lower interest rates, do 0:12:50.520 --> 0:12:52.680 you worry about what the picture could look like going 0:12:52.679 --> 0:12:56.320 into twenty twenty five, especially with so many prominent economists 0:12:56.360 --> 0:12:59.840 warning that a teriff strategy or tax cuts or further 0:12:59.880 --> 0:13:02.800 tax cuts rather could lead to more inflation. Do you 0:13:02.880 --> 0:13:08.120 worry that the inflationary or disinflationary story could be interrupted? 0:13:10.120 --> 0:13:13.120 Well, I think it's legitimate to be concerned about what 0:13:13.400 --> 0:13:17.160 happens with deficits over time. By the way, I view 0:13:17.200 --> 0:13:20.559 it as a bipartisan issue. Both sides have had their 0:13:20.600 --> 0:13:23.079 hand at this. I think it will require a bipartisan 0:13:23.160 --> 0:13:27.040 solution as well. I don't know if that'll happen in 0:13:27.120 --> 0:13:29.520 twenty twenty five, but I think long term is a 0:13:29.559 --> 0:13:33.360 country finding solutions to get us back to a better 0:13:33.400 --> 0:13:36.520 fiscal path That makes a lot of sense, and so 0:13:36.679 --> 0:13:38.840 I think it's worth looking at how can we get 0:13:38.880 --> 0:13:42.319 the growth and the debt to come down so it's 0:13:42.400 --> 0:13:45.040 manageable long term, so it doesn't eat up too much 0:13:45.040 --> 0:13:47.360 of our budget. I think that should be a goal 0:13:47.400 --> 0:13:50.319 of this country. There's so many positive things that are 0:13:50.320 --> 0:13:53.280 happening in terms of innovation. I think it's one area 0:13:53.280 --> 0:13:55.960 we've got to focus on. But I think near term 0:13:56.000 --> 0:13:59.400 it's going to be more about the disinflation that's probably 0:13:59.440 --> 0:14:02.679 going to drive the ten year treasury as versus let's 0:14:02.679 --> 0:14:04.800 say the technical supply issues. 0:14:04.920 --> 0:14:07.160 Biggest risk going into the end of year, given that 0:14:07.200 --> 0:14:09.880 you're so positive about their direction of travel. 0:14:10.880 --> 0:14:13.120 Well, I think the biggest risk is as rates are 0:14:13.160 --> 0:14:17.280 at this very elevated level, we see further slowdowns. We've 0:14:17.320 --> 0:14:20.680 seen unemployment move from three point four to four point one. 0:14:21.760 --> 0:14:25.880 You know, as companies see deceleration in their businesses, they 0:14:25.920 --> 0:14:29.040 could get more cautious. You could see more job losses, 0:14:29.280 --> 0:14:31.840 and you could see a slow down in economic growth 0:14:32.720 --> 0:14:35.040 that's greater than most people are anticipating. 0:14:35.080 --> 0:14:36.000 That would be the risk. 0:14:36.320 --> 0:14:38.840 So far, now it feels like we're on this softer 0:14:39.040 --> 0:14:41.600 landing path and that the FED is going to move 0:14:41.640 --> 0:14:44.760 to start to cut rates and hopefully they can bring 0:14:44.800 --> 0:14:48.320 inflation down. Unemployment will maybe go up a bit more, 0:14:48.360 --> 0:14:50.760 but modestly, and we'll power through this. That would be 0:14:50.760 --> 0:14:53.000 the hope, but the risk would be that we slow 0:14:53.080 --> 0:14:54.160 more than expected.