A remorseful Roth. (Getty)

Jonathan Gray, Blackstone's wizard of real estate, has spent billions buying up distressed assets during the downturn, including his brand-new bid for some of Bank of America's buildings. Still, the deal that has defined his career so far has to be Blackstone's purchase of Sam Zell's Equity Office Properties. Not only was the 2007 acquisition of 563 office properties the largest leveraged buyout of all time, at $39 billion, but it also pit Mr. Gray against one of the shrewdest men in real estate, Vornado's Steve Roth. The bullish Mr. Roth is still stinging from the loss.

The Observer spoke with Mr. Roth for this week's cover story, and he still thinks about the whopper that got away. "I'm remorseful," he said. "Obviously, we wanted that deal, we chased that deal. It was an enormous deal, and we thought it was important for our company and we sincerely thought that. When we didn't get it, I was remorseful, and I'm still remorseful. I wish we got the deal."

Still, there are no hard feelings for a man Mr. Roth very much respects. "No, of course not," he told The Observer. "Business is business. Jon's great, and Jon is still great."

mchaban [at] observer.com | @MC_NYC

Buy, buy, buy.

While The Observer was off writing our cover story on Blackstone real estate wizard Jonathan Gray, he was plenty busy himself, working out a deal to buy a bunch of Merrill's old commercial real estate, which are now controlled by Bank of America.

The exact details of the deal have not been revealed, but the price is reportedly $1 billion. Bank of America is desperate to sell its "non-core" assets to shore up its business, according to DealBook. The commercial portfolio now falls into this realm, even if it was once a big part of Merrill, and so many other Wall Street bank's, businesses. As we reported, that has been a key to Blackstone's recent success, that it has few rivals at scale right now.

At $1 billion, this is actually one of the smaller deals Blackstone has undertaken during the downturn. The firm has spent almost $10 billion on real estate since 2009, according to president Tony James, and it still has $7.4 billion on hand for more real estate deals. The tally so far:

Blackstone spent more than $2 billion on a handful of industrial portfolios in the past year, with roughly 45 million square feet at 275 facilities. There was $9.4 billion for 560 U.S. strip malls owned by Australian operator Centro. It took a stake in bankrupt mall behemoth General Growth Properties, which is controlled by Bill Ackman, the hedge fund manager who happens to be a close friend of Mr. Gray’s (they met at their daughters’ preschool). Blackstone took its stake after Mr. Ackman beat out the firm’s own bid with rival mall operator Simon Properties.

And in a sign of just how much better Blackstone has made it through the crash, Mr. Gray oversaw the purchase last October of the bankrupt Extended Stay hotel chain for $3.9 billion. He knew the business well, having bought it for $3.4 billion in 2004, before selling it three years later for $8 billion, one of countless boom-time deals that cratered. Mr. Gray was there to pick up the pieces.

It's a good time to be the king.

mchaban [at] observer.com | @MC_NYC

Gray at play. (Fred Harper)

In February 2007, Sam Zell told Jonathan Gray to buy a motorcycle.

Mr. Gray, head of the real estate division at private equity powerhouse Blackstone Group, had just closed on the purchase of Mr. Zell’s Equity Office Properties. Blackstone had announced its bid the previous November, just 13 months after Mr. Gray had stepped into his new role. He had spent his entire career at the firm, so his ascent was not so surprising, and had managed 10 deals worth a combined $32 billion so far, so the territory was not exactly new. All the same, Mr. Gray was 37 years old at the time, and he had embarked on the largest leveraged buyout in history.

On Jan. 18, less than a month before the deal was to close, Vornado Realty and two backers launched an unsolicited bid. It was $52 a share to Blackstone’s $48.50. Steve Roth, the bullish—in outlook, demeanor and build—chairman of the massive New York-based investment trust had arrived in the bookish Mr. Gray’s china shop, and it was now a scramble to fend him off.

After three furious weeks of research, negotiations and counteroffers, Mr. Gray prevailed. His offer of $55.50 was 50 cents lower than Mr. Roth’s, but it was all cash, something that the Equity Office board preferred. At $39 billion, the takeover of Equity Office crushed the previous record, the $25 billion buyout of RJR Nabisco by rival Kohlberg Kravis & Roberts 18 years earlier.

Steve Roth 'Still Remorseful' Over Losing Equity Office

Mr. Gray probably could have used some time out on the open road to relax, even if things were about to get a whole lot busier—he had to sell off at least half of Equity Office’s 563 disparate properties to pay down most of the debt taken out on the deal, lest it consume him. Yet Mr. Zell was not proposing that Mr. Gray start a new hobby. The motorcycle was meant to be a media totem.

“You have to take up motorcycles or something,” Mr. Zell told him, according to a person present. “I ride motorcycles, so they start every story with me riding a motorcycle. You need to find a hook.”

Jon Gray still does not own a motorcycle. He does not race yachts or jump out of airplanes. He is not a force in the art world, nor does he want to run for mayor. He would never be caught dead on reality TV, the World Poker Tour or even CNBC for that matter. His name rarely appears in print, and when it does, it is never attached to a quote. True to form, Mr. Gray declined to comment for this article.

Gray's Anatomy: Go Inside Blackstone's Booming Building Empire

“One of his qualities is certainly not an excess of pride,” Blackstone co-founder Peter Peterson said in a telephone interview last week. “You’d have to be a psychotherapist, I guess, to understand why he doesn’t need to grandstand at all, given his remarkable track record, but he doesn’t.

Somehow, mostly by choice and his own careful actions, Mr. Gray has managed to remain an anonymous anomaly in two of the most ego-driven industries in New York, real estate and finance. It may very well be the secret to his almost unparalleled success.

“We distinguish ourselves, as an investment organization, in the downturns,” Blackstone president Hamilton James said during an interview in Blackstone’s sleek 345 Park Avenue headquarters Monday afternoon. Thunder clouds almost obscured the views of Central Park visible through the 43rd-floor windows. “In the upturns, we do about as good as everyone else, but we tend to way outperform the downturns. Jon Gray is a big part of that.”

The only reason Blackstone was willing to tender a higher bid than Vornado was because the firm was able to begin negotiating side deals for many of the assets it was buying before the bigger deal even closed. It sold eight marquee Manhattan office towers to Harry Macklowe for $7 billion on the same day the Equity Office deal was signed, thereby forgoing $212 million in property taxes.

The Macklowe deal underscores Mr. Gray’s eagerness, even anxiety, about selling off many of the assets he acquires. In all, Blackstone would divest itself of more than $28 billion in Equity Office holdings between February and April, selling them to some of the biggest names in the industry, such as Tishman Speyer, Aby Rosen, Morgan Stanley and Boston’s Beacon Capital. Not only did the maneuver essentially give the firm the assets it wanted at a steep discount, but it also saved Blackstone from the kind of catastrophic overleverage that beset Mr. Macklowe, Morgan Stanley and so many others.

“They’re smart, they move quickly, and when they say they’re going to do something, they do it,” said Beacon CEO Alan Leventhal.

This is not to say Blackstone would stop doing deals during this time—it purchased Hilton for a staggering $26 billion in July 2007, besting the old buyout record yet again, and this time without any competition. Already sensing the impending doom, that would be Mr. Gray’s last deal until the middle of 2009.

With Equity Office and Hilton secured, Blackstone had plenty of excess capital, which helped the real estate fund weather the downturn as it prepared to take advantage of all the newly distressed assets. Blackstone launched a $1 billion fund in early 2008 to provide mezzanine lending, as the credit markets had begun to freeze up, and the following year, the main fund would begin its buying spree.

Blackstone spent more than $2 billion on a handful of industrial portfolios in the past year, with roughly 45 million square feet at 275 facilities. There was $9.4 billion for 560 U.S. strip malls owned by Australian operator Centro. It took a stake in bankrupt mall behemoth General Growth Properties, which is controlled by Bill Ackman, the hedge fund manager who happens to be a close friend of Mr. Gray’s (they met at their daughters’ preschool). Blackstone took its stake after Mr. Ackman beat out the firm’s own bid with rival mall operator Simon Properties.

And in a sign of just how much better Blackstone has made it through the crash, Mr. Gray oversaw the purchase last October of the bankrupt Extended Stay hotel chain for $3.9 billion. He knew the business well, having bought it for $3.4 billion in 2004, before selling it three years later for $8 billion, one of countless boom-time deals that cratered. Mr. Gray was there to pick up the pieces.

And That's Not It! Mr. Gray Now Wants a Piece of Bank of America

“What’s the old saying about Wayne Gretzky?” said Roy March, the CEO of Eastdil Secured, which has helped Mr. Gray structure deals almost from the start. “He doesn’t skate to where the puck is, he skates to where it will be. He is always five steps ahead.”

"I've been an admirer of his for a long time," Boston Properties boss Mortimer Zuckerman said. "We haven't done as much business I would have liked, but I think he's a very talented guy. He really knows what he's talking about." Mr. Zuckerman declined to discuss the specifics of any almost-deals.

It does not hurt that Mr. Gray now faces almost no competition. Blackstone is essentially the last firm standing in the realm of real estate equity investing. Competitors like Morgan Stanley, Lehman Brothers and Goldman Sachs’s once-vaunted Whitehall Fund have disappeared or been hobbled, and while competitors like KKR and Apollo have launched rival real estate businesses, they are years of experience and billions of dollars behind.

Blackstone has not been without its blemishes. It posted unrealized losses from markdowns in 2008 and made no deals. Still, its long-term strategy is beginning to pay considerable dividends now that the market has begun to recover. Of the $159 billion under management, roughly a fifth is held by the real estate division, but, as of this year, it has accounted for nearly 50 percent of the firm’s earnings.

The sunny Grays. (Patrick McMullan)

Jonathan Gray joined Blackstone in 1992, straight out of Penn, from which he graduated magna cum laude with a degree in English and a diploma from Wharton. A devoted numbers guy with rimless glasses to match, b-school won out over the classics, though Mr. Gray still makes time for the occasional history tome or biography. He had once considered becoming a journalist, and he openly admits to pretty much everyone that the best thing that ever happened to him was in a Romantic poetry class: he met his wife Mindy there. A Philly native, she worked for Edwin Schlossberg, the exhibition designer and Caroline Kennedy’s husband, until the first of the Grays’ four daughters was born in the late 1990s.

Mr. Gray comes from a business background, though not a finance one. His father worked in the family business, a small auto parts manufacturer on Chicago’s West Side. The 1970s were not exactly the best time for such work and eventually the family was forced to sell to a competitor. In Mr. Gray’s office hangs a poster of an old ad from the auto business his brother had blown up and framed. Above the lines of copy extolling the virtues of the company’s parts is a picture of their grandfather next to the company name: Blackstone Manufacturing. That Mr. Gray would come to work for a firm of the same name is sheer coincidence, according to acquaintances. Mr. Gray’s parents divorced when he was growing up, and his mother, another entrepreneur who ran a catering business, married a banker from Chicago Corp.

In Mr. Gray, Mr. Peterson and fellow Blackstone founder Stephen Schwarzman saw a smart, independent kid who could grow under their tutelage. “I’ve been around Wall Street now, it’s hard to believe, since 1973, and I don’t think I have ever seen this particular combination of attributes,” Mr. Peterson said. “I don’t know if you believe in compound probabilities, but when you have three critical qualities, like his talent, and like his team-building, management ability and then his human qualities, and they’re all at the very, very top rank, and they’re all in the same person, you tell me what the probability is of finding someone like that.”

No Wonder Blackstone’s Boss Just Bought a $25 M. Co-op

Mr. Gray spent his first 18 months at Blackstone working on mergers and acquisitions. Around the time he started, the founders, with an eye toward diversifying, began mulling the idea for a real estate fund. Not unlike today, the country was still littered with the wreckage of a real estate recession, driven by the savings and loan crisis and a botched building boom caused by a flood of Japanese investment.

Blackstone turned to John Schreiber, a fellow Chicagoan who had just retired from JMB Realty. As the fund was taking shape, some of the firm’s senior managers suggested Mr. Gray consider joining it, as something new and exciting but altogether incidental. He became the first, and for a time only, junior-level employee. Combining his skills with numbers and analysis with his experience in M&A and the free-reign offered by the new position, he began to cultivate his understanding of real estate. Yet it was under the tutelage of the equally low-profile Mr. Schreiber—Mr. Peterson described him as a godfather, Mr. March as Obi Wan Kenobi—Mr. Gray soon became a force to be reckoned with. “Jon Gray is maybe the best and brightest in his generation, maybe ever,” said Mr. March. “But he also has the benefit of this sage sensei in John Schreiber, which just makes him even better.”

The first real estate fund was launched in 1994 and raised $335 million, a pittance by today’s standards—the firm is currently at work on raising an unprecedented $10 billion for its seventh real estate fund, on top of the $10.9 billion fund it just closed, numbers that are all the more impressive for being raised during the recession.

After almost a decade of smaller deals, a bid for a small hotel chain made Mr. Gray and his colleagues realize they could buy entire publicly traded companies using commercial mortgage backed securities, or C.M.B.S., so long as the companies’ core assets were property. This strategy offered far greater pools of financing than typical leveraged buyouts. This allowed Blackstone to do bigger and bigger deals, the first of which was Extended Stay, the $3.4 billion portfolio of 685 properties.

“That’s where he made his imprint,” said Lonny Henry, a long-time advisor of Gray’s who ran the real estate desk at Bear Stearns and is now a vice chairman at J.P. Morgan. “It was revolutionary, not just evolutionary, in terms of how deals get done, from structure to finance.”

That year, the firm also purchased Prime Hospitality, the five Boca Resorts in Florida and 31,000 apartments in Germany, followed in 2005 by the London NYC Hotel in Manhattan, Wyndam Worldwide and a portfolio of 30 Canadian office buildings. In 2006, showing no bias for different businesses, it purchased the Zurich Senior Living portfolio of 24 retirement communities, 45 health-care facilities in France, LaQuinta resorts, the 199-bed Trianon Palace near Versailles, the 57-hotel MeriStar, England’s Center Parcs resorts, and biggest of all the 61-office Trizec and CarrAmerica, a 285-building office portfolio. The following year, of course, was 2007.

Real estate is typically a buy-and-hold business, while Mr. Gray’s mantra is more in-line with the private equity industry: buy, fix, sell. The gestation for a property is normally three to four years, though he has shown a willingness to wait longer if the profits are not there, which has especially been the case of late.

More than his intelligence, it is his detachment that sets Mr. Gray apart. He has never fallen in love with the buildings buys—he does not have an edifice complex, he does not chase trophies. His focus, even obsession, with returns has helped the firm sell coveted Manhattan office towers to someone like Harry Macklowe, while three years later he is licking his chops over warehouses by the side of the highway, gushing to colleagues about cap rates and falling replacement costs. Mr. Gray emphasizes quality, but not necessarily sex appeal.

“He is driven by pure self-satisfaction,” said Hilton Worldwide CEO Chris Nasetta, whom Mr. Gray has known from real estate deals for years and who he handpicked to run the company. His enjoyment is almost as calculating as the deals themselves. Mr. Grayt certainly does not seek the adulation of the press or even his peers, just the size of his bottom line, the glory of the returns. One friend said he is always pushing himself to do more, that he is never satisfied.

Mr. Nesetta and others also speak highly of Blackstone's involvement in the businesses its buys. Whereas most competitors farm out the management of their properties, Mr. Gray keeps a close watch, which not only informs decisions at the specific holding but also across the firm. Mr. Gray wants to keep an eye on every penny, every decision, to maximize profits, but there is also another return. Information is paramount, and a big part of Blackstone's success comes with being involved in so many different types of deals, in different sectors, different regions, different scales. "It's a big competitive advantage," Mr. March said.

Mr. Gray is fond of saying that his family is his other full-time job, and that between that and his real one, there is little time for much else. “Jon does work a lot, but he loves what he does,” Mr. Henry said. Mr. Gray makes it home every night for dinner and will reschedule meetings for a recital or a soccer game, though he also freely checks his Blackberry and works late into the night at a home office inside his five-bedroom co-op at Park Avenue’s oldest prewar apartment building. To make sure the girls grow up with the old man’s humility, there are the charities, like the Harlem Village Academy, but also two kids to a bedroom, even though there is room for each to have her own. Mr. Gray walks the mile-and-a-half to work every morning, and he prefers a simple Timex Ironman watch to something flashier—it also helps the avid runner keep track of laps.

“He’s a pretty cool, level guy,” said Jonathan Mechanic, the high-powered Fried Frank attorney who has been across the negotiating table from Mr. Gray on a number of occasions. “He’s not a table pounder. You don’t necessarily have to pound the table to get the results you want.”

Mr. Grey’s greatest asset may be his Midwestern mien. Mr. Ackman, who grew up in a real estate family, said his friend stood out in an industry full of characters precisely because he does not stand out. “He’s highly skilled, people like him, and so people trust him, and in a world where you don’t know who you can trust, it’s good to know you can take him at his word or a handshake,” Mr. Ackman said.

“People trust Jon, so they open up more,” Mr. James said. “In making deals, the more insight you have, the more you can influence the process, the better positioned you are to make a deal.” It is the Midwestern version of keeping your friends close but your enemies closer—in so far as Mr. Gray has no enemies. “He’s a closer,” said Mr. Roth, admiringly. “His objective is not to get into a big drama. His objective is to make a big deal and move on.”

Modest or manic, Mr. Gray is said to keep a low profile because he does not see the benefit of raising his, and would simply prefer to be another cog in the Peterson-Schwarzman machine. Which is not to say he is a hermit—friends describe him as animated and gregarious, but above all else, humble—he simply likes to keep things to himself. That way he can still enjoy his four daughters’ extracurriculars and not appear in The Post with his head photoshopped onto various creatures, as has happened to both of Blackstone’s founders. There is also the fact that, Blackstone being what it is, Mr. Gray’s reputation precedes him, and the press plays not role ing furthering his business interests, which are really the only interests he has. It stokes egos and fires competition and little else. “He doesn’t need the press to help him, that’s for damn sure,” Mr. Peterson said.

Try as he might, Mr. Gray may not be able to stay hidden much longer. Mr. James has big plans for his big man, according to multiple sources. “Tony James is going around telling people, ‘My job in life is to convince Jon Gray to take my job,’” as one of them put it.

Mr. James did not recall making that statement, but during the interview, he allowed that “I think he’d be great at it.” So is Mr. Gray the future of the firm? “He is certainly one of the talented individuals of his generation who could do a fantastic job running the firm. Better than me.”

Gray's Anatomy: Go Inside Blackstone's Booming Building Empire

mchaban [at] observer.com | @MC_NYC

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