All roads lead to New York City ... and all signs point to Blackstone (BX) .
In a follow-up to my earlier Real Money column on the attractiveness of New York City office real estate in a work-from-home world, I decided to go back to the Real Deal and research the largest owners of homes. Here in the city, most people call apartments home. I do. So, I was not shocked to see that, by RD calculations, in 2019 the No. 1 residential landlord in New York City was ... wait for it... Blackstone.
Yes, Steve Schwarzman's behemoth ranks first in both commercial and residential units owned in New York City, a result of Blacksotne's purchase of the massive Stuyvesant Town/Peter Cooper Village (we locals call it "Stuy Town") in 2015 for $5.3 billion in conjunction with Quebec's Ivanhoe Cambridge, the real estate arm of the province's pension fund.
So, Thursday's report on CNBC, quoting Douglas Elliman and Miller Samuel, that Manhattan's inventory of empty apartments stood at 15,000 units, up shockingly from the figure of 5,600 a year ago, was a real eye-opener. The combination of skyrocketing crime (the New York Times reports that shootings in the city rose to 242 in August from 91 a year ago the same month) under the watch of our pathetically incompetent mayor, Bill de Blasio, and the absence of demand for "short commutes," since seemingly everybody is working from home, have hammered the three main benefits of living in Manhattan: Location, location, location.
That old real estate cliche is less and less relevant to life in 2020 and urban landlords are feeling the brunt of a dissipation in demand.
So, Blackstone will bear the brunt of a pronounced slowdown in both the commercial and residential rental markets in Manhattan. That makes BX stock, at 26-times the Wall Street consensus estimate for 2020 earnings per share and 18.7-times the consensus for 2021 EPS, seem expensive. Why would anyone pay a premium to a market multiple for a company that owns such unattractive assets? I don't know.
I do know, however, that Blackstone is a very difficult name to short. Why? Because their cost of funds is dropping. Blackstone reported a 15% decline in interest expense in 2Q20 vs. 2Q19, yet their loans payable actually increased slightly to $10.8 billion versus the year-ago period. Free money is awesome! Thanks, Jay Powell!
At the end of the day, Blackstone is a very difficult to analyze financial behemoth. (Its 40-page second quarter earnings presentation is here if you would like to take a crack at it.) The issue from an investment standpoint is that money is free for everyone. I see almost zero benefits to scale in the financial world now, and clearly investing in Manhattan real estate -- either commercial or residential -- always involves a bet that scale has benefits. There aren't a lot of single-unit properties in this town.
So, keep an eye on BX stock. It's down about 20% from the highs BX hit in early February, but up about 40% from its March lows. Sometimes, in a world full of people screaming about stocks on CNBC and all over the Internet, one should actually listen to the market.
How Mr. Market treats Blackstone, an entity with a passel of unappealing assets, but a strong handle on the "Powell Put," will determine this market's tolerance for risk assets. I look for that tolerance to decline as the election nears, and I will be watching BX intently between now and Nov. 3 for clues to the market's next moves.