As commercial real estate conditions begin to show signs of improvement—though not without lingering headwinds—a familiar question resurfaces: What will become of the immense reserves of “dry powder,” the untapped capital investors have kept on the sidelines for years?
That pool is staggering. Estimates suggest it can exceed $2 trillion globally, according to McKinsey. While not all are destined for commercial properties, a significant share is expected to flow into the sector.
However, financial muscle alone isn’t enough to triumph in today’s CRE landscape, according to Dan Berman, managing partner at global law firm HSF Kramer. “Core real estate investing has been on the sidelines for half a decade,” Berman told GlobeSt.com. “That’s a long time for a lot of people who oriented themselves as a core investor.”
Unique market conditions have shaped the wait. In the aftermath of the Covid-19 pandemic, enormous liquidity, ultra-low interest rates and generous lending standards pushed property prices up and cap rates down. These forces lured many to riskier, flashier investments—terrain that doesn’t appeal to traditionally disciplined, core-focused investors.
Yet, distress in the market brings a different kind of opportunity. “What we’re doing now is loan originations by debt funds and recapitalizations of distressed assets,” Berman said. “Buying and selling isn’t as prominent, but it’s happening.”
Securing the best deals, he argued, is not about chasing rock-bottom prices. “Those people waiting for the lowest price will never, ever find a deal,” Berman explained. He likened distressed sales to Dutch auctions, where prices fall until someone steps in. “Those who want to wait for the best price will likely miss the bid when a more moderate investor places a bid to secure the opportunity,” he warned.
In this market, investors also need to look beyond traditional definitions of returns. Berman recently recounted a conversation with a client considering a well-marketed office property in Manhattan. “He has a national scope and was saying, ‘I could do this here or do residential in the Midwest or retail in the West,’” Berman said. The client’s negotiations revealed a hyper-local dynamic in New York, almost as if the city existed in a bubble.
Berman noted that while local market intelligence—knowledge of the building, the tenants, and their intentions—is crucial, true success may depend on recognizing if better opportunities might lie in another geographic region or property type. “If you are looking to go to the lowest price, you’ll be missing out on all the deals,” Berman noted.
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