Beyond Location

PE's pursuit of multifamily housing, nursing homes and shopping centers has launched a lending boom

Despite some signs of recovery in recent months, the U.S. real estate market remains soft. For example, housing starts increased in 2012 from 2011, but just barely, with the difference being only a mere 300 or so more new residential construction projects. Home sales actually fell 7.3 percent in December from November, according to the U.S. Department of Commerce, and they were worth only about half what they were before the housing market crashed in 2008. But, while these may not be encouraging signs for home owners or real estate brokers, they add up to opportunities for investors, who are eyeing multifamily homes and some types of commercial properties, including nursing homes and shopping centers, with particular glee. Private equity firms, Real Estate Investment Trusts (REITs) and strategic buyers are all taking advantage of the depressed state of the real estate market to gobble up properties, with the pace of dealmaking accelerating quickly.

"Since January, there has been an avalanche of capital and a stampede of players into the market who had been on the sidelines licking their wounds from deals done in 2007," says Matt Galligan, president of CIT Real Estate Finance.

CIT wanted in on the action as well. The firm launched a commercial real estate business in the fourth quarter of 2011. The group focuses on originating and underwriting senior secured commercial real estate loan transactions primarily in Boston, New York and Washington, D.C. In 2012, the firm closed on 21 loans, including a $25 million senior secured loan for National Resources, a real estate and investment firm focused on redeveloping corporate and industrial sites. The financing was used to develop The Lofts at Edgewater Harbor, a 150-unit residential condominium complex in Edgewater, N.J., overlooking the Hudson River. In January, CIT arranged a first-lien term loan for Kushner Companies, a real estate company headquartered in New York, and a $26 million senior secured term loan for Metropolitan Properties of America, a real estate investment firm based in Boston.

Private equity firms have shown a strong appetite for the sector as well. In fact, 156 private equity real estate funds raised $71.5 billion during 2012, which is on target with what was raised the year before, according to Private Equity Real Estate (PERE), a publication that covers the real estate market. More telling, opportunity funds, which specifically look to take advantage of falling real estate prices, raised $35 billion in 2012, a 45 percent increase from 2011. The Blackstone Group LP (NYSE: BX) raised the largest real estate opportunity vehicle during 2012, helping to push the real estate fund numbers up. Blackstone Real Estate Partners VII raised a whopping $13.3 billion.

Private equity firms obviously think there are more deals to be made. There are an additional 585 private equity real estate funds in the market and they are targeting a total of $209 billion, according to PERE. That said, there are a few firms that were active in the space and are now notably missing. Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) are not nearly as active as they were prior to the downturn. In fact, Whitehall Street International, the real estate investment fund that Goldman Sachs invested through, lost more than $1.76 billion in real estate in 2009.

This leaves room for other firms to get in action, but they aren't all large players. For example, in January, The Meridian Group, a real estate firm based in Bethesda, Md., closed a new fund with $160 million, while Westport Capital Partners raised a $963 million fund that closed in 2012.

The reason for all of the fundraising is simple: There are plenty of deals out there for the taking. Private equity firms such as TPG Capital, The Carlyle Group (Nasdaq: CG), The Blackstone Group, H.I.G. Capital and Westport Capital Partners have been very busy taking advantage of the opportunities.

"There is a fair amount of trading going on, but success depends on what level of risk an investor is willing to take on," says Russ Bernard, a managing principal with Westport Capital Partners. "I don't consider the real estate market to be at its healthiest, but that doesn't mean it isn't a great time to invest if you know what you are doing - some buyers will make a good return on their investment."


Find out more information about people mentioned in this article from our People Database:

Danielle Fugazy