Converging Trends in Commercial Real Estate Markets Highlighted

August 16, 2023 | James Sprow | Blue Vault

A recent article by Peter Grant, who covers commercial real estate trends for the Wall Street Journal, covered a lot of territory and trends in the commercial real estate space. (See “Wall Street Is Ready to Scoop Up Commercial Real Estate on the Cheap” August 15, WSJ) Like pulling a thread from a sweater, digging into a selection of Grant’s points made in the article reveals trends in the commercial real estate market that investors and asset managers alike must pay attention to.

Many trends in the commercial real estate market are converging. These trends create an interacting environment, all affecting the valuations of different CRE types in differing locations, along differing timelines. Below is a list of identified trends in Grant’s article and other recent reports:

· Higher office vacancy rates; stalled return to office rates

· Higher interest rates on variable rate debt for multifamily and other leveraged owners

· Regional banks are under pressure to reduce CRE loan portfolios.

· Large amounts of CRE debt in need of re-financing

· CRE sellers holding on rather than sell at a steep discount, and now ready to sell.

· Property sales volumes have yet to reflect new market conditions.

· Retail investors are more willing to invest in CRE funds.

· Large asset management firms are raising capital to purchase troubled CRE assets.

· Opportunistic real-estate funds run by private-equity firms have nearly $145 billion in dry powder for future investments.

· Amid affordable housing shortages, office conversions are only feasible for high income rentals.

· CRE investments pivoting to non-traditional categories: student housing, self storage, cell towers, data centers, infrastructure.

According to Grant, “Cohen & Steers, Goldman Sachs, EQT Exeter and BGO, formerly known as BentallGreenOak, are among the prominent names raising billions of dollars for funds to target distressed assets and other real estate with slumping values, according to regulatory filings.” Blue Vault is unable to verify that Cohen & Steers is creating a new fund, using internet searching tools. Grant, however, quotes a Cohen & Steers exec: “There are selective opportunities beginning to arise for investors that are in a position to take advantage of weakness,” said Rich Hill, head of real-estate strategy for Cohen & Steers, which is aiming to raise more than $2.5 billion in a new nontraded real-estate investment trust.”

Grant also quotes the CEO of Robert A. Stanger & Co.: “The last few weeks, I’ve been saying, ‘holy mackerel, they’re coming out of the woodwork,’” said Kevin Gannon, chief executive of Robert A. Stanger & Co., an investment-banking firm that tracks real-estate fundraising.”

Interestingly, another major participant in the nontraded REIT industry, Starwood Capital Group, was recently referred to as interested in doing what these other newer participants are up to. A report by Getty says: “Starwood Capital Group CEO Barry Sternlicht said last week his real estate investment trust was “foaming at the mouth” to capitalize on distress in commercial real estate. An opportunistic real estate fund may be the ticket.

The firm is in preliminary talks with investors regarding the launch of an opportunistic real estate fund, people with knowledge of the matter told Bloomberg. The vehicle hasn’t formally launched and a spokesperson for the company didn’t comment on the report.”

If just a few firms follow through with new programs raising new funds to take advantage of the sea-changes in the commercial real estate market, the next few quarters should reveal a lot of exciting developments for alternative investments such as nontraded REITs and private equity.

Sources

WSJ (8/15/23), Getty (8/11/23)