Motivated Sellers – April 29, 2024
Trepp last week highlighted a class of commercial real estate sellers that is expected to become especially active between now and 2029. It’s private equity real estate (PERE) funds, which are expected to sell $2.2 trillion of assets globally during that time frame.
The reason for this massive selloff? A report from U.K.-based research firm Oxford Economics makes clear that it’s simply a matter of timing. In the years between the Great Recession and the COVID-19 pandemic, the funds were quite active at, well, fundraising, more than doubling assets under management from $500 billion in 2013. But what goes up must come down as the funds reach the end of their lifespans.
“As the wave of capital raised between 2014 and 2021 reaches its maturation phase, we anticipate a substantial increase in overall fund maturities, peaking around 2029,” Oxford Economics reported. “Growing fund maturities along with a large pool of assets in extension periods will amplify the pressures on PERE asset disposals over the coming years.”
That “large pool of assets” would represent quite an investment opportunity on its own: an estimated $200 billion worth. It’s a backlog accumulated over the past couple of years, which have seen PERE fund disposals fall well short of their typical pace.
“Consequently, we think asset sales from PE funds could almost double relative to the volume recorded over the past five years, which could push PERE funds to become the largest single source of sellers,” the report stated.
To some extent, according to Oxford Economics, the heightened activity we’ll be seeing was “an inevitable outcome as closed-ended PERE funds have been the largest net buyer of real estate over the past decade in Europe and APAC, and second largest in North America. Globally, PERE funds have accounted for around about a third of all direct property acquisitions between 2014-2019, and all these assets are in vehicles with stated maturities.”
For would-be buyers, the volume and quality of fund assets coming to market may conjure up feelings of being the proverbial kid in a candy store. Yet Oxford Economics warned that the impending increase in asset disposals could hold “profound implications for the real estate market, potentially affecting property values and investment dynamics. An influx of assets into the market can lead to increased volatility,” potentially exerting downward pressure on property pricing if supply significantly exceeds demand.
Moreover, the report noted that investment demand for these assets will be mixed, with some sectors and geographies finding liquidation fairly straightforward, while others will face tougher sledding. “The general pre-pandemic trend of ‘too much capital chasing too few assets’ could become more balanced as investors become more selective about asset classes or markets,” the report stated.
Things could become especially interesting in the office sector. More than 40% of PERE acquisitions worldwide between 2014 and 2019 occurred in office, according to Oxford Economics. Since then, though, Trepp pointed out, “work-from-home policies brought on by the COVID pandemic have caused many employers to rethink their office needs, driving up vacancy rates while compressing property values.” Citing data from Cushman & Wakefield, Trepp noted that the vacancy rate for U.S. office properties was 20.2% in the first quarter of this year, up from 13.2% in Q1 2020.
Don’t expect the PERE sector to function simply as net sellers. Oxford Economics noted in conclusion that the sector is poised for “a significant phase of both acquisitions and disposals, driven by maturing funds and accumulated dry powder. But the looming wave of asset disposals will also create an opportunity for those targeting particular asset classes or markets to seek out opportunities from private fund disposals.”