Private equity real estate investors are raising money faster than they can spend it. U.S. funds have amassed a record $287.8 billion for commercial-property deals, according to Preqin. That’s up 11% from a year earlier and 57% more than at the end of 2019.
The pileup of capital affirms the bet that real estate’s rally will continue while inflation rises, stocks wobble and bond returns lag — and despite new Covid-19 variants that could threaten a comeback for offices, hotels and malls. U.S. property investment volume is expected to rise by 5% to 10% next year as firms try to spend down their dry powder, according to CBRE Group Inc.
Private equity giant Blackstone Inc. raised $33.5 billion for real estate deals in the first three quarters of this year while deploying only $25.3 billion. The challenge is that clients — pensions, endowments, high-net-worth individuals — are hungry for more.
“Investors view real estate as a safe place to be in an inflationary and low-rate environment,” Nadeem Meghji, Blackstone’s head of America’s real estate, said in an interview.
The volume of cash chasing deals helped drive up U.S. commercial-property prices an average of 18% in the 12 months through November, led by a 22% jump in warehouses and other industrial real estate, according to Real Capital Analytics Inc. An expected surge of distressed deals hasn’t materialized, freezing deployment of more than $91 billion in dry powder.
Sales have already set an annual record, with $614 billion booked in the first 11 months of 2021, Real Capital data show. Some of the increase stems from pandemic-delayed deals that finally closed. But many sellers also moved to reap profits.
GTIS Partners unloaded $1.6 billion of real estate this year and is routing capital to construct new single-family rental homes, apartments and warehouses, which can generate higher returns than existing buildings.
“Our trade is to sell old and build new,” said Tom Shapiro, president of GTIS, a New York-based real estate investor with $4.2 billion in assets. “Our focus is on putting money to work versus raising money.”
While stepping up direct investment, private equity is also contributing to the record $4 trillion of debt outstanding for real estate, lending as much as $100 billion this year, according to the Mortgage Bankers Association. The private equity money is funding construction, remodeling and other relatively short-term borrowing that’s often too risky for banks, charging higher interest rates in exchange for more generous terms, such as greater loan-to-value ratios and no prepayment penalties.
“We are getting paid to take risks,” said Warren de Haan, co-chief executive officer of Acore Capital. He expects to lend $10 billion next year, up from $7 billion in 2021.
So far, it’s been hard to make bets far out on the risk spectrum. Acore announced a $1 billion fund for hotel rescue financing in February but has only deployed $200 million, and de Haan said he doesn’t anticipate more deals unless new Covid variants topple the the travel rebound.
As the pandemic drags on and remote work becomes more acceptable, office buildings may be the next big target for investors seeking discounted properties. Current owners are reallocating money to other real estate sectors, said Kristin Gannon, managing director at investment bank and brokerage Eastdil Secured.
“Several institutional investors are unwinding office,” she said.
Blackstone is targeting property types with higher demand than supply, based on demographic and technological trends — life-science labs instead of traditional offices, warehouses rather than malls. This week, the firm agreed to buy apartment landlord Bluerock Residential Growth REIT Inc. in a deal valued at $3.6 billion.
“In an inflationary environment, if you own assets with pricing power,” Meghji said, “they should outperform.”