Recovery in Real Estate M&A Deals
M&A activity in the real estate markets fell to its lowest level in three years in 2023, but as financing costs decreased and equity markets have risen considerably, present conditions appear to be favorable for an a comeback.
Only eight deals for roughly $38 billion were executed last year, the lowest volume in four years. It was the fifth-lowest year in terms of transaction volume since Real Estate Alert began tracking activity in 1996. Aside from 2020, this was the only year with fewer than 11 transactions since 2011.
However, investor sentiment has begun to shift toward cautious optimism.
Goldman Sachs anticipates deal-making volumes to rebound to pre-2018 levels as the Federal Reserve begins to lower interest rates later this year. Real estate transactions, prompted by significant post-pandemic market adjustments, will most likely follow global M&A patterns.
Citigroup is also positive on real estate M&A trends in 2024. “We see an increased activity level in boardrooms and willingness to think through strategic options,” said Jens Thomas Jung, a managing director in the real estate and lodging M&A group at Citigroup.
“…we’ve come through a long period in the markets with a disconnect between buyers and sellers on valuations and we see that disconnect vanishing. So, it’s hard to see another year with subdued deal activity as the overall factors that are facilitating transactions are starting to outweigh the negatives, favoring a rebound,” Jung added.
Last year, the cost of financing made most real estate transactions nearly impossible to complete. Cedrik Lachance, director of research at Green Street, the parent company of Real Estate Alert, suggests that modifying return expectations could be a key factor in overcoming the challenges posed by elevated interest rates.
“The real estate world is priced appropriately, and you’re starting to get close to levered returns that work for the classic private equity owner,” Lachance said. “They’re not great, but they’re starting to get close. …What you need from the private side is accepting that the new world is a lower-return world for them, on a levered basis.”
Hodes Weill & Associates expects an increase in M&A activity this year, particularly in the second half. The anticipated increase is tied to investors’ perceptions that the financial markets have stabilized.
The capital advisory firm focused on the real estate and real assets investment and funds management industry, noted that interest from buyers remains diversified, with minority stake investors, real estate or real assets platforms looking to add “complementary capabilities” and “large” alternative asset managers looking to enter new sectors.
The firm expects more pronounced growth in real assets control transactions as managers pursue less mature and faster growing institutional allocations.
PwC also anticipates a healthy year for private capital, noting a more stable investing environment and renewed confidence that real estate M&A activity will grow.
“We believe the starting bell is sounding for a resumption in M&A activity, wrote Eric Janson, global private equity, real assets and sovereign funds leader, PwC U.S. “This is good news for private capital sitting on record levels of dry powder but also puts general partners (GPs) under increasing pressure from limited partners (LPs) to invest and make distributions from prior investments.”
Private capital has approximately $12 trillion in assets under management, noted Janson, nearly twice the amount it had in 2019, highlighting the significant buildup in unrealized value. He expects many of these investments will come to market in the next 12 months.
“Around the world the real estate industry is undergoing a transformation, prompting shifting M&A strategies, enhanced focus on value creation and upskilling of professionals to fit this new environment,” added PwC’s Tim Bodner, global real estate deals leader, partner, PwC.
