A year plus of Covid quarantines has created attractive investment opportunities in the real estate sector, resulting from several trends, including near-empty office buildings as companies shifted to Work from Home, and many retailers closing up shop. “The uneven recovery of the U.S. economy has created significant opportunities for real estate investors who are nimble, and able to target a broad range of property sectors and geographic areas,” WHI Real Estate Partners LP managing principal David Rosenbaum tells Mergers & Acquisitions. Rosenbaum is one of many sources we spoke to in our in-depth look at PE and M&A in the real estate sector.

Vacant office buildings and retail stores are making it an ideal time for private equity firms to raise funds to target deals in those types of properties. Everything else that ranges from self-storage spaces to warehouses are attracting investors too. A surge in e-commerce sales is leading to a demand for more warehouse space.

Meanwhile, there is a growing need for real estate-related software, including data that helps realtors track demographics, and digital technology that assists lenders and homebuyers manage the mortgage process.

Michael Lyon

Software, especially touchless technology for offices as they gradually reopen, will also see interest. “Touch-free access and visitor management will be key as more offices re-open and shared residential space becomes more prevalent,” says Michael Lyon, managing director at technology-focused investment bank Vista Point Advisors.

Here are some key trends that will drive M&A in the real estate sector:

Opportunistic Fundraising

Private equity firms are raising funds to take advantage of desirable real estate opportunities that were created by the pandemic. In March, Cerberus Capital Management LP raised $2.8 billion for its flagship global opportunistic real estate strategy fund. Cerberus Institutional Real Estate Partners V LP closed with more than $2.5 billion in commitments with an additional $300 million committed to a dedicated investor fund for the strategy.

“The investment landscape plays to the strengths of our global real estate franchise,” said Lee Millstein, president of Cerberus global investments and global head of real estate, in a release. “There are market dislocations and macrotrends that are driving compelling opportunities across our broad platform. Our team will continue our disciplined approach to investing opportunistically, establishing innovative partnerships, and applying our operating capabilities and experience to solve complex problems.”

In February, self-storage operator Go Store It, announced that its joint venture with Cerberus has acquired twelve self-storage assets consisting of 6,000 units.

Other firms are following a similar strategy. In May, real estate-focused investment firm WHI Real Estate Partners LP closed WHI Real Estate Partners V LP  at $385 million. The fund will invest in residential, hotel and office properties in the U.S., according to a release.

David Rosenbaum

“The uneven recovery of the U.S. economy has created significant opportunities for real estate investors who are nimble, and able to target a broad range of property sectors and geographic areas,” says WHI managing principal David Rosenbaum. “We’re currently focused primarily on middle-market asset repositioning and development opportunities in the industrial and multifamily sectors, but it’s not unlikely that our targets will shift as market conditions evolve.  Agility has always been a key element of our investment approach.”

Surge in Warehouse Deals

In addition to self-storage and office properties, warehouses, especially those involved in the e-commerce and logistics sectors, are attracting buyer attention. Online retailers have been adding fulfillment centers to meet consumer demands for faster shipping times. More local fulfillment centers means faster delivery times and lower last-mile costs to both retailers and customers. Last-mile is the last leg of the delivery process where the products reach their final destinations.

“Online shopping has accelerated during the pandemic and heightened demand for e-commerce fulfilment services,” according to a 2021 Capstone Headwaters report called ‘New Factors Impact Valuation in Storage, Supply Chain and Fulfillment.’ “As a result, and with this trend expected to continue over the next few years, acquisition activity in the fulfillment sector has also accelerated and brought heightened valuations for companies that provide the infrastructure to make e-commerce possible.”

In March, KKR acquired of a five-building industrial portfolio in Phoenix totaling approximately 540,000 square feet for $68 million. The portfolio consists of last-mile warehouses located less than 10 miles from downtown Phoenix, according to KKR. 

“The favorable demographic trends in Phoenix that we saw in 2019 and 2020 have continued to accelerate in 2021,” says Ben Brudney, a director in KKR’s real estate group, at the time the deal was announced. “We are excited to further grow our footprint in the market with the addition of this portfolio. Phoenix is an important market for us as we continue to expand in 2021 and beyond.”

One of KKR’s competitors, Blackstone, is also betting on warehouses. In December 2020, Blackstone Real Estate Income Trust bought 13 industrial properties from Iron Mountain (NYSE: IRM) in a sale-leaseback transaction.

“The industrial sector continues to benefit from strong demand driven by e-commerce tailwinds,” said David Levine, senior managing director in Blackstone Real Estate, when the deal was announced.

Tech Plays a Role

As buyers seek physical assets to purchase, technology plays a growing essential role in the real estate industry. Software, ranging from managing the mortgage process to data providers on industry trends, are being bought up by both strategic buyers and private equity firms.

“Prior to Covid, the mortgage market was in a state of flux,” says Lyon. “Most notably, there was a growing move toward digital lending, with consumers increasingly opting to utilize online platforms to finance and refinance their homes. Covid has simply further catalyzed this change.”

For example, First American Financial Corp.’s $350 million acquisition of fintech provider Docutech from Serent Capital expands First American’s digital offerings to real estate lenders. Docutech is well-known to home buyers and those refinancing mortgages. Anyone who has bought a home recently or refinanced a mortgage has probably used Docutech to e-sign documents from the lender, especially in Covid. Docutech provides the technology mortgage lenders use to deliver mortgage and settlement services online, essential tools in the era of Covid quarantines. Serent invested in the company in 2016.

“The Docutech acquisition demonstrates our ongoing commitment to invest in and grow our core business,” said Dennis Gilmore, CEO of First American, when the deal was announced. “It also reflects our dedication to improving the home buying experience and driving the digital transformation of the real estate settlement process. Together, we’re uniquely positioned to provide collateral file management from the inception of the mortgage process through post-closing, which will help accelerate the evolution of real estate closings.”

And in another PE deal, Thoma Bravo, a private equity investment firm focused on the software sector, has acquired RealPage Inc., a provider of software and data analytics to the real estate industry, in a transaction valued at approximately $10.2 billion, including debt.