On Oct. 14, the Graaskamp Center Leadership Series featured keynote speaker Nadeem Meghji, Senior Managing Director in the Real Estate Group and Head of Real Estate Americas for Blackstone. Meghji has played a role in some of Blackstone’s largest acquisitions including Stuyvesant Town, Peter Cooper Village, Biomed Realty Trust, and Brixmor Property group. Moderated by Irgens Executive Director Mike Brennan, the event covered a variety of topics in a wide-ranging discussion that shed some light on how the best in the business approach real estate investing in the COVID era.
The discussion began with an overview of the macroeconomy, including the impacts of COVID. Meghji first explained the severe economic dislocation that occurred in March and April — the economy was growing at 2.5 percent but suddenly experienced an unemployment rate of 15 percent with instability in the capital markets. The Federal Reserve and U.S. government responded with unprecedented fiscal and monetary stimulus, surpassing anything seen in the Great Financial Crisis of 2008. These measures, in addition to the passage of time, have resulted in the beginnings of a “square root” recovery, reflecting a quick bounce back followed by a flatline. But confidence in the economy is contingent upon a vaccine that is manufactured and widely distributed.
Meghji then moved into his thoughts on the macroeconomic implications for Blackstone’s allocation strategy and for their current portfolio. He noted that sectors can be broken into three groups: those that are benefiting from COVID, those that are impacted but temporarily so, and those that were impacted prior to COVID which has accelerated the negative trend. Blackstone has continued to invest in growth sectors during the downturn, and these assets represented much of the portfolio before the epidemic.
However, Meghji noted that patience is critical because investors need to see where fundamentals bottom when a vaccine comes and what a recovery looks like. He believes there is no benefit in seeking out opportunistic investments too early and there are more opportunities ahead in these temporarily affected sectors.
When asked about geographic preferences, Meghji said that Blackstone has historically invested in cities that benefit from a combination of innovative life science, tech clusters and supply constraints (New York, Los Angeles, San Francisco). However, second-tier Sunbelt cities have been gaining traction and will continue to do so, and the fundamentals for Canadian logistics are also quite strong. As it relates to COVID, Meghji explained how Blackstone is looking at the world through a different lens- they look for a catalyst in one place and then apply that catalyst more broadly.
This provided a segue into how Blackstone handles international risk. Meghji said that international expansion has been an organic process, with growth occurring gradually over the past thirty years. Blackstone has seeded its international offices with the “Blackstone DNA” by placing people who grew up with the business in the U.S. and understand the Blackstone investment philosophy in global offices.
Brennan then asked if Blackstone’s approach to asset-level risk and development has changed given the strong fundamentals in certain sectors. Meghji noted that Blackstone has historically skewed away from development and instead prefers to buy at a discount to replacement cost using leverage to magnify returns. He did mention that Blackstone will take on some development risk today, but only in sectors with strong fundamentals where they have differentiated strategies.
The discussion concluded with Meghji’s thoughts on an asset bubble and allocations to real estate. He said that we are currently in a low yield environment, unlike anything investors have ever seen before, and this will continue for at least a few years. This environment is pushing insurance companies, pension funds and sovereign wealth funds to increase allocations to real estate but, as he alluded to earlier, certain real estate sectors are performing better than others and will likely cause cap rate compression for the better sectors.
Nadeem Meghji received a BS, summa cum laude, in Electrical Engineering from Columbia University, a JD from Harvard Law School and an MBA from Harvard Business School. He is also a board member for the Lupus Research Alliance and is the co-chair of the annual Rally Against Lupus fundraiser. Meghji was named World Economic Forum Young Global Leader in 2018.