Private Equity Funds, REITs Pull In $272 Billion in 2019, Buying Almost $164 Billion in Property
By Mark Heschmeyer
CoStar News
Major property buyers completed a record fundraising year, collecting money that helped drive unprecedented property sales as investors seek lower volatility from commercial real estate.
Private equity real estate fundraising in 2019 exceeded $150 billion for the first time to reach $151 billion, according to private capital data provider Preqin. Publicly traded real estate investment trusts raised $109 billion, the highest amount in 10 years and twice as much as raised in 2018, said the National Association of Real Estate Investment Trusts, known as Nareit. And nontraded REITs closed out 2019 with more than $11.8 billion raised, their highest fundraising total since 2014, according to investment banking firm Robert A. Stanger & Co.
The three groups combined accounted for more than $164 billion in property acquisitions last year while only selling $113 million in properties, according to preliminary 2019 CoStar data. Total sales for 2019 have already topped $617 billion, a new annual high amount. New York-based private equity giant Blackstone Group led capital formation, raising $8.7 billion. Starwood Capital Group also gained traction, with $874 million raised.
"More and more institutions have realized the particular attractions of real estate as an asset class," said Robert Calhoun, a CoStar managing director and senior economist. "Players are sitting on record dry powder at the moment and they don’t get paid to hold cash."
Institutional investors have roughly doubled their allocations into real estate over the past 20 years. As an asset class, commercial real estate offers built-in leverage for the owner as the vast majority of properties are funded with mortgage debt. And as lending to the market has grown increasingly competitive, the terms for borrowers continue to become more favorable.
"This makes commercial real estate look something like the Holy Grail for institutional investors, lower volatility with higher returns," Calhoun said.
The number of private equity funds in the market is now at an all-time high, according to Preqin data. Those funds held about $319 billion as of December.
Among sector-specific funds, multifamily and residential have emerged as the property types of choice, attracting 43% of closed capital between 2017 and 2019, up from 30% of funds between 2015 and 2016.
Large Funds
From the onset, 2020 is poised to be another strong year for mega funds, with 10 vehicles in the market targeting $2.5 billion or more, according to Justin Hall, head of real estate for Preqin.
After being net sellers of properties in 2018, public REITs returned to being net buyers last year. They purchased nearly $64 billion in properties, about $11 billion more than they sold.
The acquisition activity reflects improved cost of capital and optimism about future returns in real estate, according to Nareit.
"The strong stock price performance of equity REITs in 2019 reduced their cost of capital and made equity issuance and acquisitions more attractive," Calvin Schnure, senior vice president, research and economic analysis for Nareit, told CoStar.
"REIT share prices have been trading at a premium to [net asset value] since last spring," Schnure added.
REITs are likely to continue to access the equity markets to increase their holdings of income-producing properties in 2020, he said.
Nontraded REIT fundraising is benefiting from the spread of private equity funds into the field.
"The entrance of institutional asset managers into the nontraded REIT market has transformed the industry and will continue to fuel fundraising," according to Kevin Gannon, chairman and chief executive of Stanger. "As retail investors seek to diversify in the light of market uncertainty, they now have access to real estate funds managed by the same well-regarded firms that institutional investors turn to."
Stanger is projecting that nontraded REITs will raise more than $15 billion in 2020, as firms such as these continue to ramp up sales.