When will private equity money impact commercial real estate? – Commercial Observer


Ron Dickerman traveled to San Francisco in the depths of the Great Financial Crisis (GFC) to meet a wealthy private investor, one stop among many as he traveled the country on a sort of road show.

It was about seven years since Dickerman founded his private equity real estate investment firm Madison International Realty in 2002. The investor told him, “We are in the midst of a global financial crisis and recession, and j have $ 1 billion in the bank and want to start buying assets.

This investor, however, thought the downturn was a “recession without an opportunity.”

“His view… was that there hadn’t been much of a price sell-off” – or when the write-offs in the midst of a downturn led to a period of massive and panicked selling in the market – a said Dickerman. It’s something that happens naturally before a recovery. “Looking back, there was actually a price capitulation, and the prices have risen significantly since 2009 and 2010. But, at the time, it didn’t seem that cheap.”

Commercial real estate is gradually coming back to life after the pandemic as the United States begins to ramp up for a summer reopening. Most signs point to the country on the verge of significant economic expansion, and institutional investors have been busy building up to take advantage of the developments.

For years, the real estate industry has been dominated by a huge pile of cash reserves held by private real estate funds. According to recent data from Preqin for April 2021 (reported by The the Wall Street newspaper), private real estate funds have about $ 356 billion in unspent cash, about $ 1 billion more than in December 2019, before the start of the pandemic, and more than double what existed at the end of 2008. Over the past two decades, the amount of capital held by these funds has swelled by around $ 330 billion (the GFC has also spawned a wave of new entrants raising funds to invest in real estate. )

During the coronavirus pandemic, pension funds and other large institutional investors decided to allocate more capital to commercial real estate investment. Despite the price uncertainty and the fact that the price capitulation has not yet materialized in this downturn, real estate presents a strong hedge against the risk of rising inflation, while showing a relatively low return profile. stable and solid.

In a survey released in late 2020 by consulting firm Hodes Weill & Associates and Cornell University, the average global commercial real estate allocation target by large institutions increased slightly in 2020 to 10.6%, up from 10.5% in 2019. There 212 institutions from 29 countries responded to the survey, and in total, they held $ 12.6 trillion in assets under management (AUM), with a portfolio combined real estate investment amounting to $ 1.3 trillion.

Last year, the large Swedish pension fund Alecta was one of the leaders in increasing its targeted allocations to real estate, according to the Hodes Weill and Cornell survey; Alecta, which has around $ 119 billion in assets under management, has decided to target 20% of its investment capacity on real estate, up from 12% in 2019. Elsewhere in Europe, the Dutch pension fund of The $ 84.3 billion Industry Pension Fund for the Construction Industry has decided to increase its allocation to the sector by 300 basis points, to 19%.

In the United States, one of the country’s largest pension funds, the California State Teachers’ Retirement System, which has approximately $ 262.5 billion in assets under management, has indicated that it is increasing its allocation to the ‘real estate, while smaller funds and endowments like the Kansas Public Employees’ retirement system or the University of California’s general endowment pool have followed suit, according to the Hodes Weill and Cornell survey.

Keith Breslauer, founder of London-based real estate private equity firm Patron Capital Advisors, told Bloomberg in April that “there is a lot of money on the sidelines looking for yield and you have a market that will rebound enough. considerably… That’s why 2021 is interesting. “

Dickerman’s Madison International Realty closed its Liquidity Fund VII in March 2020 at $ 1.2 billion, and it was reported at the time that the fund’s investors included high net worth individuals, insurance companies, foundations, public and private pension funds, sovereign wealth funds and family offices located in the United States, Europe and Asia-Pacific, as well as the Middle East.

He said general investor sentiment regarding real estate and what it means for his own fundraising was positive, but Dickerman declined to comment further. He added that the general feeling within the real estate community is that investor interest has shifted, “becoming more aware of the industry than ever before … they are much more focused on [specific] sector exposure.

And it shows, with investment firms large and small focusing more onpandemic-friendly asset classes ”such as industrial, life science, multi-family and single-family homes for rent in an effort to align with their investors.

Madison International Realty has a rich history in the retail business. It owns leading real estate in some of the world‘s largest markets, such as the great London shopping and entertainment center Covent Garden or the Atlantic Center in Brooklyn. And, while it could cause problems in the midst of a pandemic, the company has taken big steps to capitalize on coveted asset classes of the COVID-19 era. The company is a constant player when it comes to joint ventures or the purchase of shares in public companies, and it has taken advantage of this strategy to place itself in advantageous positions for its investors.

For example, in November 2020, Madison invested $ 200 million in IQHQ, an influential life sciences real estate investment trust (REIT) chaired by Alan Gold, who founded cannabis real estate financier Innovative Industrial Properties. in 2016 and was previously CEO of Life Sciences. REIT BioMed Realty prior to its sale to Blackstone in 2016.

Large investment managers and developers like Blackstone and Brookfield, as well as stores like Oxford Properties – the direct real estate investment arm of Ontario’s municipal employee pension system, one of the largest pension funds in this country. countries – have made great strides in coveted COVID-19 sectors in the United States and abroad.

Investment management companies have also developed at a breakneck pace war treasures for debt mounting or acquisitions. Before the end of 2020, Blackstone Real Estate Debt Strategies closed an $ 8 billion debt fund vehicle, the largest to date. And a few weeks later, in January 2021, Fisher Brothers’ Lionheart Strategic Management closed a mezzanine debt fund of roughly $ 250 million in equity funded by a UK-based investor.

It is clear that the appetite is there, but this powder keg of hundreds of billions of “dry powder” which has existed for many years in real estate private equity and continues to grow is still not ready to explode.

What’s important is that across all the asset classes people want to buy, the price capitulation that could lead to waves of trading activity hasn’t materialized, Dickerman said. Commercial real estate prices during COVID-19 did not drop the same way they did during GFC, and they began to rebound six months later in September 2020, according to the Commercial Real Estate Price Index American analysis company Green Street.

Federal government support for the economy has helped prop up many real estate sub-sectors, but that hasn’t completely stopped the pandemic from creeping into leisure, hospitality and retailing.

Yet the latest Labor Department figures point to the history of the recovery.

The country created 599,000 jobs in May, exceeding the expectations of some economists and giving hope after a lull in April. Fitch Ratings expected to see around 400,000 to 500,000 new jobs created in May and it expects to see those numbers every month for the next several months, the company’s chief economist, Brian Coulton, told Commercial Observer.

And while the job market is still down by around 8 million jobs from the pre-pandemic period, jobs in recreation, hospitality and education saw an increase in hiring in May, and consumer spending has also exploded – supported, in part, by stimulus measures. This serves as an early sign that, as the pandemic continues to subside, supply is catching up with demand in the labor market. In an April survey by the Bureau of Labor Statistics as part of its employment report, about 3 million people said they were unable to look for work due to restrictions related to the pandemic .

“I think the demand may have come back faster than the supply,” Coulton said of hospitality, recreation and travel. “And it may well be a less attractive sector to work than before; it is a low-wage sector, and it will be the first to be affected if the pandemic resurfaces. “

Inflation has also slowly risen, as during this time the Federal Reserve has been instrumental in keeping interest rates low through its bond buying programs. Still, there is a long way to go before the Fed begins to consider reducing its bond purchases in favor of higher interest rates, which would make borrowing more expensive for real estate investors, said. Coulton.

“I think it would be premature, even if we [had gotten] a million jobs in [May]”he said, adding that the Fed’s overarching goal is to return to full employment before moving on to a hike in interest rates, which Fitch predicts would call for 7-7, 5 million new gigs, over 18 months. The Fed has shown it to be more tolerant of higher inflation than in the past, “a big change in their reaction function and this needs to be taken seriously,” because as far as they are concerned, they are past the last five to 10 years. ”

High inflation, of course, would prove detrimental to the economy as a whole, but economists expect the Fed to act before that happens. However, in the short term, this makes real estate more attractive and could be beneficial for the continued recovery of the sector.

“Prices go up, values ​​go up and rents can be increased, and if you’ve fixed your borrowing costs over a long period of time, there are a lot of benefits,” Dickerman said. “There is an argument for buying now, even though the prices have not capitulated.”

Real gross domestic product (GDP) grew at an annual rate of 6.4% in the first quarter of 2021, according to data from the Commerce Department’s Bureau of Economic Analysis, and with growth projections for the remainder of this year fluctuating. between 6 and 7%. range. Dickerman added that he believed that “now the United States is at the forefront of vaccine recovery and science. The economic story is going to be extremely positive.

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