The Year Is Getting Tough for Private Equity in CRE

Early in 2022, the importance of private equity was never clearer. A big reason ESG grew as a force in CRE investment expectations is because it became a priority for many private equity firms. More recently, it has been expected the private equity will step in, at least in part, where other CRE lenders have fled.

Now with the first quarter of 2023 closed, the view of private equity as a directing force seems murkier, according to data from Preqin.

“It’s been a tough start to the year for real estate,” the firm said. “Preqin Pro data shows there have been only 1,399 real estate deals by private funds so far. By contrast, in the first quarter of 2022 alone, there were 1,997. Fundraising has also taken a considerable hit. In the first three months of 2023, $22.9bn was raised across 96 funds, the worst quarter by value for fundraising since 2017.”

This didn’t happen at the snap of someone’s fingers, and it wasn’t a strategic decision for the PE firms so much as a result of decisions by limited partners. Capital commitments had been slowing, with 64% of them allocating less than $50 million to real estate in the next 12 months. The year-over-year comparison was 51% limiting exposure to that degree.

Developing CRE market conditions explain a lot. Interest rates have been up with Federal Reserve mixed attempts to stem inflation. Property values had been elevated from previous large injections of liquidity from dovish monetary policy. However, downward pressure on rent rates of all kinds—particularly the wayward office market—meant an inability to justify the resulting low cap rates going forward. General financial uncertainty also meant a lack of pricing certainty, with falling transaction rates adding in to reduce price discovery. It isn’t surprising that investors have become more cautious.

Preqin noted that there is a record 2,067 funds, with a total of $548.5 billion in capital, currently in the market. According to multiple experts that GlobeSt.com has spoken with over the last half year, that also means many funds are relatively inexperienced in the asset class and likely struggling meeting the internal return rates they might have promised to investors.

While value-add, opportunistic, and core strategy approaches are most of the funds and money, there’s an increase in CRE debt funds—current count of 245 seeking a combined $83.8 billion. “So far this year, 19 real estate debt funds have closed globally, worth a total of $7.2 billion,” Preqin wrote.

There is one other aspect to consider. Last year, at least until the Fed funicular started dragging interest rates up the hill, was insanely busy. Capital continued its flood in, dealing was de rigueur, and the year-over-year comparisons are to unusually high values and figures.