Blackstone Aims To Be Recession-Proof With Big UK Regional Offices Play

Blackstone’s £180M debut in UK regional offices will be the first of a wave of investment across Birmingham and Manchester — but it also shows how expansion can be defensive, as European Head of Acquisitions Samir Amichi told Bisnow in an exclusive conversation.

It is barely three weeks since Blackstone splashed down into the UK regional office market, paying £182M for a slice of Birmingham’s prime Colmore Row office district. The deal with Ashby Capital saw Blackstone acquire the 329K SF Colmore Building for the Blackstone European Property Income Fund.

The deal came as Birmingham office take-up gathers pace in an accelerating post-pandemic recovery. Around one-third of the 175K SF first quarter city centre take-up was in brand new floorspace around Colmore Row.

Blackstone Head of Acquisitions for Europe Samir Amichi said the tightly constrained central business district, rising demand and a sharp fall in supply help explain the move into regional offices, notable due to the size of the deal, which is huge for the Birmingham market. It also reveals the defensive strategy that will help the investor weather a recession.

“We’re high-conviction, thematic investors and so focus on cities and submarkets in cities which we believe have specific drivers that will result in higher growth. That’s what we’re trying to do," Amichi said.

"So with UK regions, we may spend more time on Birmingham and Manchester for example because we’ve seen some phenomena at play that make them quite interesting. Key UK regional cities have come out of the pandemic looking fairly well, and I think that’s especially evident in Birmingham.

“We’ve seen data showing that of 40 European cities, just six saw a decline in office vacancy during the pandemic, and Birmingham is one of these six — that makes it an outlier in a positive sense. Clearly demand has outstripped supply and proven resilient — and recently we’ve seen a pick-up in demand in a quite meaningful way.”

Birmingham’s imminent super-fast rail link to London, HS2, is part of the background to Blackstone’s move.

“Talking to our contacts we can already see a lot of senior people are living in Birmingham and commuting to London either daily or several times a week,” Amichi said.

This partly explains why Birmingham was preferred to Manchester. “It’s more difficult to travel back and forth for business from Manchester to London daily than it is from Birmingham — we work with a lot of professional services firms with footprint there, and for them that is perhaps an advantage that Birmingham has," Amichi said.

“Birmingham has seen some trends, such as office growth being more pronounced, more quickly than in Manchester. And the CBD in Birmingham is centred around one corridor, which is attractive to a real estate investor because that creates a natural barrier to entry.”

The super-tight pitch of Colmore Row is an advantage for Blackstone, but that does not mean Manchester’s more sprawling central zone is a deterrent.

“No. We can deal with that, it just makes things a bit more nuanced. Manchester is a little more complex but that doesn’t make us any more cautious," Amichi said.

“We’re spending time on both — they both present similar features with great opportunities. We had an ad hoc opportunity to acquire The Colmore Building in Birmingham and so we pursued it, but we’re also pursuing Manchester.”

Will there be more in Birmingham and Manchester? Absolutely, said Amichi. Blackstone, he made clear, doesn’t make orphan investments.

"We bought this building because we believe in the city, and we take into account factors such as north shoring and the levelling up agenda and its rebound post-Covid. If you believe in all of these, and we do, we should look to do more in the city and that’s what we’re going try to do," he said.

“I would love to do more in Birmingham. They could be larger lots or smaller, because when you have scale you can do smaller transactions. £180M was the perfect lot size for us, but something 30% larger or 50% smaller would also be good.”

Amichi won’t say if further deals are imminent but said: “We are constantly talking to market participants in the cities we focus on.”

Blackstone will focus on the funkiest workspace, Amichi hinted.

“If you find a building that the young, educated workforce would love to work in — one, for instance, my colleagues here would like — that’s a good telltale sign. It shows the landlord is aware of workforce needs for quality, sustainability, the social aspects of how a building fits into a community. So if I feel my younger colleagues would like to be there, I’m interested,” Amichi said.

There is also the prospect of stretching outside Birmingham and Manchester, but Amichi gave the impression this is not imminent. Pressed on intentions in Leeds and Bristol he said: “We have presence in Bristol as part of our student housing business, but we haven’t yet found enough critical mass in either city as we have in Manchester or Birmingham. But that’s not to say we won’t. We’ll do this sequentially. Both are cities that have performed really well in recent years. Even so, we were struck by how favourable the trends in Manchester and Birmingham were, which is why we focussed there first.”

Of course, there are risks. A decade of eccentric monetary policy, a global pandemic, an inflationary surge and a European war add up to nobody’s idea of the perfect investment background. Amichi said that the threat to GDP, and hence to office occupancy, was real. But that by focusing on the best offices in the tightest pitches, it was a risk Blackstone could mitigate.

“We believe there will always be opportunities for the right assets in the right location," Amichi said. "There is correlation between GDP growth and office demand, so an economic slowdown will likely impact the appetite for more office space. That being said, sectors like TMT, life sciences, content creation, are all growing extremely rapidly and relying on the most talented workforces and these corporates are unlikely to focus on working from home. We believe that will drive demand for office space.

“Offices also have to go through a transition as regards to sustainability. We have got to look out for that critically, and ensure any building we invest in can be or is already future-proof.

“We think buildings are more protected when supply is limited and there are higher barriers to entry. These are features we look out for. Because Birmingham’s CBD is limited primarily to one strip which is incredibly difficult to replicate elsewhere, we feel better about the sustainability of current rent levels.”

Having taken the plunge into the UK regional office market, Blackstone has devised a strategy that allows it to sit out whatever comes next.