Stephen Schwarzman didn’t make it big by betting small. His career has been defined by taking big chances. Currently the chair and CEO of The Blackstone Group, he detailed many of those big bets in his recent autobiography, What it Takes. From his days as class president at Abington High School, to the humbling process of trying to launch Blackstone in 1985 with Pete Peterson, Schwarzman’s life has been defined by going big at every turn.

Blackstone has since grown to include investing businesses focused on private equity, hedge funds, credit, infrastructure and life sciences—among others—but many of the firm’s biggest bets have been in real estate. Indeed, Blackstone is one of the largest real estate investors in the world, with roughly a quarter of its $545 billion in assets invested in the sector.

Blackstone has been behind some of the largest real estate transactions in history, including the purchase of Hilton Properties in July of 2007, and the 2015 purchase of Stuyvesant Town in New York City for $5.5 billion.

I spoke with Schwarzman for the launch of his autobiography about his career and his views on the investing landscape – particularly in real estate.

Silver: Blackstone has made big bets on real estate over the years, and now it's one of the biggest real estate owners and investors in the world, and it’s the biggest part of your investment portfolio today. What are your basic rules for identifying great real estate opportunities? What do you look for?

Schwarzman: Real estate is a straightforward business. We have a few rules.

  1. We buy existing opportunities that we can improve. We don’t do development. Development has much more risk than buying an existing building. We like the conservatism of buying something existing.
  2. Secondly, we only buy things that we can improve. We are not interested in just buying a cash flow stream. We want to make something better. After you made it better, you can sell it for more. 
  3. Third, we're a thematic investor. Real estate has different asset classes within real estate, ranging from office buildings and apartments to shopping centers and warehouses. Different asset classes have different fundamentals at different points in an economic cycle, as well as the potential for technological disruption. For example, we sold all our shopping centers and everything in retail when we saw Amazon developing this enormous momentum in 2010, and we decided to become an even bigger buyer of warehouses. Warehouses have been a big performing asset class in retail over the past 5 years. Many retailers, not just Amazon, have had to convert to having online capability. You need warehouses to store your goods in order to have them delivered to the customer. That led us to a whole area where we have huge exposure where rents are going up double (or more) than any other asset class.
  4. We also look at real estate as a global opportunity. At some point, there is not as much capital in a geographic area. For example, we bought a lot in Scandinavia, which has turned out to be very good.
  5. The final rule is looking at replacement costs. Making sure you are well below it when you buy something is really important.

When we have completed our task of enhancing a property, we sell it. We have a little mantra called, “Buy it, Fix it, Sell it.” 

Silver: Where do you see real estate opportunities over the next decade?

Schwarzman: Looking out 10 years… in real estate, there is a trend of people moving to cities from suburbs. That trend will make apartments in cities a good place to be. It will change your geographic orientation. If you are a U.S investor, you will want to have a bias to be in low tax rates and easier work environments. If you look out 10 years, there will be real shifts that you can already see happening in the north to south migration of people. People are moving from high tax to low tax states like Florida, Texas, or North Carolina, where you can onshore workers. 

It used to be the case that when people got jobs, they would choose their location based on the job. Now, many younger people look for the location and hope to find a job. If they go to the right places, the jobs will move to find them.

In real estate, there are world cities that are knowledge-based cities. Those are Seattle, San Francisco, Austin, even New York and London. You’ll find cities in India like Mumbai, Chennai, Bangalore… finding industries that you know are going to have explosive growth and following them around the world, as you look out 10 years, those are going to be very good. And there are specialty cases in biotech and research, which is, rapidly accelerating. We are one of the biggest owners of wet labs for biopharma. That’s another one of these trends. 

Silver: Blackstone’s purchase of the Hilton properties in 2007 turned out to be a great call. But Hilton was an established brand with a big footprint already. Do you believe that the hotel business will still be a smart place to invest in the next decade or two?

Schwarzman: As wealth increases, more people will travel. That should be a catalyst to do things that are connected to the travel business, whether those are gateway cities or other popular places. Those should have good outcomes.