The commercial real estate (CRE) industry is still in a pinch as Federal Reserve Bank of Minneapolis President Neel Kashkari expects "big losses" in the sector. Blackstone Global Co-Head of Real Estate Nadeem Meghji sits down in-studio with Catalysts to give his perspective on the economic headwinds and banking challenges bearing down on CRE.

"The two things that make us most optimistic today are one, the cost of debt capital is coming down, and the availability of debt capital is improving. That's leading to more transaction activity, we're seeing three times as many bidders today for assets as we saw only six months ago," Meghji says.

Meghji lays out what kind of spaces his company is investing in, including data centers: "This is the fastest growing and most exciting area for us as a firm today."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Luke Carberry Mogan.

Video Transcript

Turn to commercial real estate work from home practises has led to record vacancies, at least in the office side of things.

And that, coupled with high interest rates, has really challenged the industry landscape.

Earlier this week, Minneapolis Fed President Neil Kashkari warning about some of the challenges within the sector, saying Quote, We expect there to be big losses in the commercial real estate industry.

So here to talk little bit more about that and give us the lay of the land we want to bring in.

Nadeem aeg Gee, he is a global co head of Blackstone Real Estate.

Nadim, It's great to have you here on set.

Thanks so much for joining me.

Thanks for having me, Shana.

So talk to me just about what you are seeing within the CRE landscape and maybe some of the warnings that we've heard from policymakers, others within the market Are they a bit overblown?

Well, I think a where a lot of that is coming from is the fact that the last couple of years have been tough for commercial real estate.

I think we all know that you've had a combination of a higher cost of capital which has put downward pressure on values and challenges in the office business.

Uh, we believe today that a lot of that bad news is largely priced into asset values.

And if anything, what we're seeing is values bottoming.

And the two things that make us most optimistic today are one.

The cost of debt capital is coming down and the availability of debt capital is improving.

That's leading to more transaction activity.

We're seeing three times as many bidders today for assets as we saw only six months ago.

Story continues

The other tailwind that we're seeing is new construction activity, which is down 40 to 75% in our major sectors.

Now, despite all of that, the headlines are going to remain negative.

Why?

Because this will relate to deals that were done in a different environment.

Assets that were financed 234 years ago will potentially have challenges.

Banks will incur losses.

Frankly, from our perspective, that will result in sentiment remaining negative and really lagging reality.

And to us, that represents a deployment opportunity, I was gonna say so it is now the time to be more offensive then, given the fact that you are seeing some opportunity.

And then within that where are you seeing the most opportunity at these levels?

Absolutely.

We believe that this is an opportune moment for us to be playing offence, and that's what we're doing.

So over the last six months, we've deployed nearly $20 billion of equity capital globally.

Um, and we're doing it in our high conviction sectors and our our premise around all of this is that we're not gonna wait for the all clear sign because once you get that, it's too late and you miss the vintage.

And that is exactly what happened Coming out of the financial crisis in 2009 in terms of where we're deploying, you know, 80% of our business today is in places experiencing secular growth because of technology and demographics.

That's where we're doubling down.

We're buying data centres.

We just entered into a $7 billion data centre joint venture with Digital Realty.

We're investing in warehouses driven by E commerce.

Uh, we're seeing still high single digit cash flow growth, uh, in that space today because of E commerce.

We're also investing in rental housing despite a bit of an uptick in supply today.

The long term trend is really that of a structural shortage.

We announced a $10 billion privatisation of air communities, coastal apartments, uh, a $3.5 billion privatisation of Tron residential Sunbelt single rentals.

And then the last thing I would say that we're doing that we're really excited about is we're buying senior mortgages today from banks at discounts that includes our acquisition of an interest in Signature banks $17 billion mortgage loan portfolio.

And the idea around all of this is that we're taking a long term view in a moment when people are nervous and we have $64 billion of dry powder, which allows us to do that when others might not be able to.

And Nadeem, you certainly are seeing a a massive opportunity.

It sounds like right now I wanna go back to what you had just said there a moment ago about data centres.

More specifically, talk to us just about the trends that you are seeing there, that rapid growth that we are expecting and I guess how big of a portion, maybe, or what that size that opportunity looks like specifically for Blackstone.

Sure, I mean, I think this is the fastest growing and most exciting area for us as a firm.

Today we through breed as well as other vehicles, uh, within Blackstone own today, QTS data centres the fastest growing data centre company in the world.

If you look at our global business today we have approximately $50 billion of data centres that we own or are building with another 50 billion behind that.

What's driving it is very simple digitization of the economy, the cloud and most importantly, the A I revolution.

And if you want to find a way to play a I from a hard asset perspective, data centres are a great way to do it.

We're seeing explosive growth and demand up 11 times over the last five years and we think we're still in the early innings.

Nadine, when we when we talk about some of the troubles within commercial real estate, a number of those that we have spoken on even on this programme, I talked about just the fact that the Fed needs to cut rates in order to really see that turnaround take place or in order for CRE to really gain some momentum.

It doesn't sound like that's necessarily the case, at least from your view.

Yeah, look, in the medium term, we do see downward pressure and inflation, and we think rates will follow.

I think what's more important, though, is stability in the rate environment.

And what we're more focused on is long rates, which today are still around 50 basis points lower than their October highs.

That, coupled with credit spreads coming down and the volume of debt financing improving really matters much more in terms of a real estate recovery.

Nadine, Meg is great to have you here in the studio.

Thanks so much for joining us here on Yahoo Finance Flex and Real Estate Global co head.

Thanks a lot, Nadine.

Thank you, Shana.