Wall Street Eyes Bargain Deals in Real Estate
Wall Street is getting ready to capitalize on the downturn, in the real estate market. Major financial firms are teaming up to buy properties at prices compared to just a few years ago. Leading the charge are companies like Cohen & Steers Goldman Sachs, EQT Exeter and BGO (formerly known as BentallGreenOak) who have raised billions of dollars for acquiring assets as revealed in official filings.
Kevin Gannon, CEO of Robert A. Stanger & Co. an investment banking firm that keeps an eye on real estate fundraising activities expressed surprise at the surge in interest. "I've been truly amazed by the increase in activity " he said. This heightened interest reflects the fact that the commercial property market is currently going through one of its periods in decades. Factors like rising interest rates leading to borrowing costs and a slow return to office spaces resulting in vacancy rates have contributed to this downturn. Once stable investments such as apartment buildings are now considered riskier since owners are struggling to refinance them at high rates. Malls have also seen drops, in value with some experiencing declines exceeding 70% over years.
In the past many property sellers were hesitant to lower their prices to meet buyer demands.
However it appears that a shift is currently taking place as more and more owners of office spaces are opting to sell their properties under distress. This change signifies a phase, in the real estate industry, where owners are either relinquishing their properties to lenders or accepting whatever they can get instead of waiting for the market to recover.
A prime example of this phenomenon is the sale of an office tower located in downtown San Francisco. Clarion Partners sold it to developer Presidio Bay for $41 million, which's considerably lower than its purchase price of $107 million back in 2014.
Rich Hill, an expert in real estate strategy at Cohen & Steers shared his insights on the emerging opportunities for investors. He noted that commercial property values have already experienced a drop of around 10 15% since reaching their peak year. Hill predicts a decline of 20 25% drawing comparisons to events such as the savings and loan crisis and the global financial crisis.
Data from MSCI Real Assets reveals that distressed commercial real estate has seen an increase of $8 billion in Q2 marking the significant quarterly rise since Q2 2020. While some new funds are focused on purchasing properties others plan to provide loans, to property owners—bridging the gap left by banks and mortgage real estate investment trusts.
It's quite interesting to observe that these new investment funds, like the ones managed by Invesco and Cohen & Steers are specifically targeting investors. Over the seven years the nontraded real estate investment trust industry has seen growth raising approximately $100 billion. However some of these REITs were established before the rise, in interest rates. Now face pressure to return funds to investors who wish to cash out.
Despite the enthusiasm surrounding these funds they will face competition from well established funds that primarily focus on institutional investments. According to Preqins data private equity firms managing real estate funds have around $145 billion for future investments.
The future remains uncertain as it relies heavily on how the U.S. Economy performs. If there is an transition with inflation, under control overseen by the Federal Reserve without causing a recession then distressed opportunities may not materialize as expected. As Michael Stark, co head of PJT Park Hill Real Estate Group mentioned, many people are currently "awaiting sellers."
This information is sourced from an article published in The Wall Street Journal.
Read the full article here.