Jonathan Gray, Blackstone’s Real Estate Wizard Behind the Curtain

He's taken over the world, so why not the firm?

“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.

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“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.

Jonathan Gray, Blackstone’s Real Estate Wizard Behind the Curtain