Blackstone, Willis Tower, and the Future of Office Real Estate

What if extending a billion-dollar loan six times isn't a sign of distress, but a bold strategic play? Today, we unravel Blackstone’s intriguing maneuver with the iconic Willis Tower. Far from being a financial disaster, Blackstone is leveraging the tower’s unique appeal and robust performance—boasting new tenants and above-average occupancy rates—as a calculated move in a shaky office market. Discover how the charm of the Skydeck and a $500 million renovation investment are playing pivotal roles in their decision to hold tight, future-proofing this landmark in a post-pandemic world.

Join us as we dive into the complexities of commercial mortgage-backed securities (CMBS) that add layers to Blackstone's financial strategy. Unlike a typical bank loan, navigating a CMBS involves negotiating with a plethora of investors, which Blackstone seems to be mastering with six extensions secured so far. Through this discussion, you'll gain insight into Blackstone’s confident stance on the office market's rebound and why their management of Willis Tower is more than just a game of real-life Monopoly. Discover the secrets behind Blackstone's deft handling of both market dynamics and investor negotiations.

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Transcript

Speaker 1: 0:25

Welcome back to the Deep Dive. Today we're going to take a closer look at Blackstone and their hold on the Willis Tower. You sent us some articles about their interesting loan situation.

Speaker 2: 0:38

Yeah, pretty wild stuff.

Speaker 1: 0:39

It looks like they're trying to extend this loan for like the sixth time.

Speaker 2: 0:42

Sixth time.

Speaker 1: 0:43

Which is just crazy to me, and we're talking about a loan for over a billion dollars A billion. So this is high stakes. It's like a real life game of Monopoly, but with a lot more on the line.

Speaker 2: 0:57

Definitely higher stakes and you know, sometimes, just like in Monopoly, sometimes the best move is to hold on to your property.

Speaker 1: 1:03

Right.

Speaker 2: 1:03

Even when things are looking a little dicey. So this whole situation with the Willis Tower is fascinating, I think, because it gives us a glimpse into Blackstone's strategy, yeah, and it kind of tells us a little bit about the state of the office market overall these days.

Speaker 1: 1:16

Yeah, that's a great point. So let's talk about these loan extensions. Yeah, six loan extensions. That sounds like a major red flag to me. It does. Isn't that usually a sign that a company is in trouble, like they're struggling financially?

Speaker 2: 1:29

Normally you would think so right, like I mean, a company asks for an extension because they're short on cash.

Speaker 1: 1:33

Sure yeah.

Speaker 2: 1:34

But the funny thing is, all signs point to the Willis Tower actually doing pretty well, really. Yeah, they are attracting new tenants, their revenue's actually up and their occupancy rate is higher than the Chicago average.

Speaker 1: 1:47

Wow.

Speaker 2: 1:48

So there's something else going on here, something a little bit more strategic, it seems.

Speaker 1: 1:52

So if it's not financial distress, then what is Blackstone's game plan? What are they doing?

Speaker 2: 1:58

Well, imagine this You've got this really valuable property.

Speaker 1: 2:01

Okay, yeah.

Speaker 2: 2:02

But the market's a little bit shaky. Right, do you sell it?

Speaker 1: 2:05

Okay.

Speaker 2: 2:06

Maybe at a loss, or do you hold on to it?

Speaker 1: 2:31

make some upgrades, wait for things to rebound and then maybe sell it later. That's essentially what Blakestone is doing here. They're playing. What makes them so confident that the office market is going to bounce back, especially with so many people working remotely now?

Speaker 2: 2:38

Well, I think there's a few factors at play. First of all, the Willis Tower isn't your average office building. It's iconic, it's a landmark, and it also has the Skydeck, oh yeah, which brings in, I mean, tons of revenue from tourists. That gives them a bit of a cushion that a lot of other office buildings just don't have.

Speaker 1: 2:55

It's like a secret weapon in this whole office market saga.

Speaker 2: 2:59

Absolutely. And there's another thing they're not just sitting back and waiting. Blackstone actually invested something like $500 million to renovate the Willis Tower a couple years ago. Wow $500 million to renovate the Willis Tower a couple of years ago. Yeah, they're adding new amenities, they're upgrading spaces, really trying to make this building a top choice for businesses in, I guess, a post-pandemic world right.

Speaker 1: 3:19

Yeah, they're trying to future-proof the building, essentially.

Speaker 2: 3:21

Yeah exactly.

Speaker 1: 3:22

Let's talk about this loan for a second. Okay, you mentioned it's not a typical bank loan. This is a CMBS.

Speaker 2: 3:28

It is.

Speaker 1: 3:28

What's so special about that?

Speaker 2: 3:31

typical bank loan. This is a CMBS. It is what's so special about that. A CMBS, it's like a whole other beast. Ok, think of it this way. Imagine instead of getting a loan from one bank, you get it from a whole bunch of people Right who all chip in. That's basically what a CMBS is, you know. It's a loan that's sliced up and sold off to different investors.

Speaker 1: 3:46

So it's like crowdfunding a mortgage.

Speaker 2: 3:47

Sort of yeah.

Speaker 1: 3:48

Sounds complicated.

Speaker 2: 3:49

It is definitely. It adds a whole other layer of complexity. So Blackstone isn't just dealing with one lender. They're dealing with a whole bunch of bondholders and to get an extension they need to get agreement from a majority of these investors.

Speaker 1: 4:03

And that can't be easy.

Speaker 2: 4:05

Not easy at all. So they're not just fighting the market, they're fighting or navigating, I guess, this really complicated web of investors.

Speaker 1: 4:13

So how have they managed to get six extensions already?

Speaker 2: 4:16

Well, that's a good question and I think it speaks to Blackstone's financial uh, I guess skills.

Speaker 1: 4:23

Yeah, savvy.

Speaker 2: 4:24

Savvy. Yeah, they've clearly been able to make a really compelling case to these bondholders, you know, convincing them that holding onto the Willis Tower even though it seems risky, yeah.

Speaker 1: 4:35

It's a smart move in the long run.

Speaker 2: 4:37

Okay, so they're playing the long game and they're playing it well.

Speaker 1: 4:39

So far so good Okay.

Speaker 2: 4:41

I'm starting to see why this is such a fascinating case study. So what happens next?

Speaker 1: 4:47

Well, good question.

Speaker 2: 4:48

Are they just going to keep kicking this can down the road with more extensions?

Speaker 1: 4:52

Eventually, they're going to have to make a decision, right, yeah, Do they refinance, do they sell? Maybe something completely unexpected? Right, and whatever they decide is going to send ripples throughout the market. It's a billion dollar bet and everybody's watching Exactly To see if this gamble pays off. But to really understand the potential outcomes here, I think we need to take a closer look at the Willis Tower itself.

Speaker 2: 5:19

Okay, let's do it. Okay, let's zoom in on the Willis Tower itself for a minute.

Speaker 1: 5:22

Okay.

Speaker 2: 5:22

We've talked about the sky deck and we've talked about the renovations itself for a minute. Okay, we've talked about the sky deck and we talked about the renovations, but what else makes this building so special? Like what is Blackstone doing to make it stand out in this crowded market? Well, you know, if you're a company and you're looking for office space, Sorry, location is key, right, you got to be close to transportation and restaurants and all that.

Speaker 1: 5:42

Absolutely.

Speaker 2: 5:43

And the Willis Tower is in the heart of Chicago's loop.

Speaker 1: 5:46

Plus, it's the Willis Tower.

Speaker 2: 5:47

Exactly the views alone are, I mean, a major selling point, right?

Speaker 1: 5:53

Yeah.

Speaker 2: 5:53

But it goes beyond that.

Speaker 1: 5:55

Okay.

Speaker 2: 5:55

Remember that $500 million renovation. That wasn't just a cosmetic makeover. They completely revamped the amenities of the building.

Speaker 1: 6:03

Really.

Speaker 2: 6:04

Oh yeah, State of the art fitness center tenant lounge that feels more like a really fancy hotel lobby. Wow, Multiple dining options. They're trying to create an environment where people want to be.

Speaker 1: 6:18

So they're not just offering office space. It's like an experience.

Speaker 2: 6:20

Exactly An experience, and that's crucial in today's market. I think yeah, because people have gotten used to working from home. They have the flexibility. Right you know they're comfortable, so to get them back in the office you got to offer something pretty good. You got to give them something special, something they can't get at their kitchen table.

Speaker 1: 6:37

And it seems to be working because you said they've landed some new tenants. They have pretty big ones too Recently.

Speaker 2: 6:43

Yeah, like AdTalem Global Education. I mean massive 84,000 square foot lease.

Speaker 1: 6:49

Huge. Yeah, that's not a small commitment, especially in this market.

Speaker 2: 6:53

Definitely not. I mean that shows that these companies believe in the future of the Willis Tower.

Speaker 1: 6:56

Yeah.

Speaker 2: 6:57

So, yeah.

Speaker 1: 6:57

I'm curious, though, what kind of I guess concessions is Blackstone making? Are they lowering rents? Are they offering flexible leases? I need the details.

Speaker 2: 7:06

Right, well, I don't know about the free pizza every Friday.

Speaker 1: 7:09

Okay.

Speaker 2: 7:09

But we do know they're being strategic with their leasing terms.

Speaker 1: 7:12

Okay.

Speaker 2: 7:12

Of course, they're offering competitive rents, sure, but they're also creating really flexible spaces.

Speaker 1: 7:18

Okay.

Speaker 2: 7:18

That can adapt to a company's changing needs. They understand that. I guess the way we work is changing Right and they're designing the Willis Tower to accommodate that.

Speaker 1: 7:29

So it's not just about getting any tenant in there Right. It's about finding the right tenants, right, the ones that are committed to being there Exactly, who are willing to pay for that premium experience.

Speaker 2: 7:39

Exactly, and I think this is one of the areas where Blackstone's strategy really differs from what some other landlords are doing.

Speaker 1: 7:46

Okay.

Speaker 2: 7:47

You know, we see building owners slashing rents, offering all kinds of crazy concessions just to fill up space.

Speaker 1: 7:53

Just to get people in the door.

Speaker 2: 7:55

But Blackstone seems to be taking a different approach.

Speaker 1: 7:58

It's like they're not panicking.

Speaker 2: 7:59

Not at all.

Speaker 1: 8:00

They're sticking to their guns.

Speaker 2: 8:01

Yeah, believing that quality is going to win out.

Speaker 1: 8:04

Yeah, the experience, exactly yeah.

Speaker 2: 8:06

That people are willing to pay for a better experience.

Speaker 1: 8:08

It's almost like they're saying look, we're not going to race to the bottom here, we're going to elevate this entire game.

Speaker 2: 8:13

This is what the future looks like.

Speaker 1: 8:15

Yeah.

Speaker 2: 8:15

Yeah, I think so, and it highlights their belief in the long-term value of the building. But, let's be realistic for a second. Not every company can afford a fancy office in the Willis Tower. What about smaller businesses, startups, you know, the ones that maybe are perfectly fine working remotely or in a co-working space? Where do those companies fit into this changing workplace? The reality is, the future of work is probably going to be some kind of hybrid model Some companies fully remote, some back in the office full time and then lots in between.

Speaker 1: 8:54

Right. So is Blackstone just ignoring that segment of the market.

Speaker 2: 8:59

I don't think so. Remember Blackstone's a massive investment firm. They're not just you know.

Speaker 1: 9:04

They have their fingers in a lot of pots.

Speaker 2: 9:05

In all kinds of things. So you know co-working spaces, other flexible office solutions. They're not putting all their eggs in one basket, they're diversified.

Speaker 1: 9:15

Okay. So they're hedging their bets a bit. They're playing the long game with the Willis Tower, but they're also you know, they're exploring other avenues.

Speaker 2: 9:24

Right.

Speaker 1: 9:24

For those companies that are looking for something different.

Speaker 2: 9:28

Exactly, they're adapting and I think they're really trying to anticipate what the future of work looks like.

Speaker 1: 9:32

Okay, that makes sense. So let's pull back for a second. Okay, and look at the bigger picture, okay.

Speaker 2: 9:37

Yeah.

Speaker 1: 9:37

What does Blackstone's strategy with the Willis Tower? What does that tell us about the office market in general?

Speaker 2: 9:44

Yeah.

Speaker 1: 9:45

Is this a sign of optimism or is this just, you know, kind of a temporary blip in an otherwise downward trend? Pretty fascinating, right. We've got this iconic building, a smart investor playing the long game, and then all this uncertainty about the future of work. So what does it all mean, this uncertainty about the future of work? So what does it all mean? Is Blackstone's confidence in the Willis Tower? Is that a sign of confidence in the office market as a whole, or is this just a clever way to delay what's going to happen anyway?

Speaker 2: 10:15

Yeah, that is the million dollar question, isn't it? I don't know if there's a simple answer. I think Blackstone's strategy is like this fascinating experiment, and we're all kind of watching to see how it plays out.

Speaker 1: 10:24

But what do you think Are they? Are they on to something?

Speaker 2: 10:26

Well, I think it's important to remember that Blackstone. You know they're not sentimental, they're not holding on to the Willis Tower for, you know, nostalgic reasons. Right, yeah, they're in it to make money. Right, they think it will be profitable and their track record suggests that they're. They're pretty good at making those calls.

Speaker 1: 10:43

So I mean they're not afraid to walk away if things go south.

Speaker 2: 10:46

Not at all. No, they're not married to this building.

Speaker 1: 10:49

OK.

Speaker 2: 10:49

They'll do whatever makes financial sense, even if it means selling.

Speaker 1: 10:53

OK, that makes sense, but let's play devil's advocate for a minute. Ok, what could go wrong here?

Speaker 2: 10:59

Well, a lot of things could happen, right. I mean, the economy could tank, interest rates could go through the roof. Maybe some new technology comes along and totally changes how we work, making offices totally obsolete.

Speaker 1: 11:13

Yeah, so there's a lot of risk involved here, even for a company like Blackstone.

Speaker 2: 11:18

Absolutely yeah, but I guess that's investing right. You weigh the risks, you weigh the rewards. You make the best decision you can with the information you have.

Speaker 1: 11:28

And in this case they've decided to double down on the Willis Tower.

Speaker 2: 11:31

They have.

Speaker 1: 11:32

They're betting that people are still going to want to work in you know incredible spaces, even if they don't have to.

Speaker 2: 11:37

That's right. I think they're betting on. You know our human need for connection, for collaboration. Yeah, you know even just those water cooler moments that you can't really replicate online.

Speaker 1: 11:48

Yeah, and let's be honest, there's something about working in a landmark building.

Speaker 2: 11:54

Yeah.

Speaker 1: 11:55

And, you know, in a cool city in a vibrant city that you just can't get at home.

Speaker 2: 11:59

You can't get at home. There's a buzz, there's an energy, there's a sense of possibility.

Speaker 1: 12:03

For sure.

Speaker 2: 12:03

That you just you don't get sitting on your couch in your pajamas.

Speaker 1: 12:07

So what does all this mean for our listeners? Should they be, you know, running out to buy office space right now? I don't think so or packing up their desk and moving to the mountains?

Speaker 2: 12:18

Probably not either extreme right. I think the future of work is still in the written. Yeah not either extreme right. I think the future of work is still in the written. There's no one size fits all, but I think the key takeaway here is that the office isn't dead, it's just changing.

Speaker 1: 12:32

It's evolving.

Speaker 2: 12:32

It's evolving and companies like Blackstone are leading the way. They're experimenting with new models, trying to figure out what the workplace of the future will look like.

Speaker 1: 12:41

So it's not about choosing between the office or remote work Right. It's about finding that right mix. That right balance the balance that works for you Exactly your company, your life.

Speaker 2: 12:52

That's what makes it so fascinating. I think it's not just about one building or one company.

Speaker 1: 12:57

Yeah.

Speaker 2: 12:57

It's about. You know the nature of work itself. How is it changing?

Speaker 1: 13:01

And the choices that these companies are making today.

Speaker 2: 13:03

Yeah.

Speaker 1: 13:04

Those are going to shape how we work tomorrow.

Speaker 2: 13:07

Totally.

Speaker 1: 13:08

So think about your own situation. You know whether you're a CEO, a freelancer. You know wherever you fall on that spectrum.

Speaker 2: 13:16

Yeah.

Speaker 1: 13:16

What do you want the future of work to look like?

Speaker 2: 13:18

Yeah, what kind of space, what kind of environment helps you do your best work and and live your best life?

Speaker 1: 13:24

Because that's what it's all about, right.

Speaker 2: 13:25

That is what it's all about. The future of work is in our hands. I think it's up to all of us to shape it in a way that's productive and fulfilling.

Speaker 1: 13:33

Yeah, I love that. Well, on that note, I think we're going to wrap up this deep dive. Thanks for joining us as we explored this whole world of commercial real estate and the changing workplace. Until next time, keep exploring.