Private Equity Investors Slow Real Estate Buying in First Quarter

CRE Purchases Down 60% Year over Year; Fundraising Slows as Investment Funds Already Loaded with 'Dry Powder'

CoStar - Mark Heschmeyer - 11 May 2017

The private equity real estate market, which saw exceptionally strong fundraising and dealmaking activity in 2016, seemed to pause and take some profits in early 2017. 

CRE-focused equity funds completed 136 major property investments in the first quarter of 2017 totaling $6.1 billion, according to CoStar Group COMPs data. That total is well off the nearly $15 billion in purchases the same set of investors made in the first quarter of 2016. 

Equity funds were net sellers of CRE property in the first quarter of this year, completing 171 dispositions totaling $7.9 billion - about in line with the same quarter a year ago. 

PE buyers showed a preference for office property investments completing 26 buys totaling $2.167 billion. Multifamily was the second biggest property type category with 47 transactions totaling $1.607 billion. Retail was third with 29 deals totaling $1.547 billion, and industrial was fourth with 28 deals totaling $811 million.

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While PE investors were busy stocking up on office deals, they were selling multifamily and industrial properties. PE sellers unloaded $3.6 billion of multifamily properties in 49 transactions, and $2.3 billion of industrial properties in 22 deals. PE funds also sold $1.4 billion in retail property in 32 deals, and $1.5 billion in office properties in 35 deals.

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First Quarter Fundraising Also Slowed

PE real estate funds globally raised about $16 billion in the first quarter, according to Preqin, an alternative assets industry information provider. This represents a decline from fundraising totals seen in the first quarter of last year ($26 billion), and is well short of the $32 billion raised by real estate funds in the fourth quarter of last year. 

The number of CRE investment funds reaching a final close also declined sharply during the first quarter, falling from 72 in the last quarter of 2016 to just 38 in the first quarter this year. 

More of that money and a lot of the previously raised money has yet to be used. Dry powder available to private real estate fund managers rose slightly in the quarter, from $237 billion at the end of 2016 to a new record of $245 billion at the end of Q1, Preqin reported. 

While it appears investment and fundraising momentum may be slowing, Andrew Moylan, head of real estate products at Preqin, said we are just in the early innings of the game. 

“Of particular note are the multibillion-dollar funds currently in market. Several have already held interim closes, and may well be on course to reach a final close before the end of the year,” Moylan said. “If this does happen, we could see 2017 rise to match 2016 as another landmark year for the industry.” 

More than half (58%) of the funds currently in fundraising mode said they plan to primarily invest in North America and are seeking to raise $107 billion from institutional investors. This is more than the combined capital targeted ($82 billion) by funds focused on real estate investment in other global regions.