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.
Cash Stack
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.