Blockbuster real estate deals are back and breaking records as cash from around the globe pours into U.S. office buildings, apartment complexes and other investment properties.
Commercial real estate transactions jumped 45 percent by dollar volume in the first quarter, an increase driven by sales of multiple buildings or entire companies, according to research firm Real Capital Analytics Inc. Since then, General Electric Co. agreed to sell real estate assets to Blackstone Group LP and Wells Fargo & Co. in a deal valued at about $23 billion, the largest property purchase since the financial crisis.
As the pot of money set aside for U.S. commercial real estate grows, competition for the best properties is pushing investors to buy in bulk. Based on the pipeline, which includes the GE deal, the second quarter may be one of the biggest on record for property transactions, according to Real Capital.
“It’s so hard to get things on a single-asset basis,” said Janice Stanton, an executive managing director at commercial brokerage Cushman & Wakefield Inc. “You’re starting to see larger and larger transactions.”
Real estate deals surged to $129 billion during the three months through March, marking the most active start to a year since 2007, according to Real Capital. The largest was Blackstone’s $8.1 billion sale of IndCor Properties Inc., an owner of industrial buildings, to GIC Pte, Singapore’s sovereign-wealth fund.
Booming Demand
Demand for property from warehouses to skyscrapers is booming, helped by more than six years of Federal Reserve efforts to stimulate economic growth by keeping interest rates low, and stockpiles of cash from overseas investors seeking a haven. About $24 billion in foreign capital flowed to U.S. properties in the first quarter, more than half the total for all of 2014, according to Cushman.
That number is poised to grow further because the majority of sovereign wealth funds — investors such as GIC — have yet to hit their target allocations for real estate, according to Preqin Ltd., an alternative-assets research firm. Total property allocations for such funds now top $6.3 trillion, more than double the amount in 2008, London-based Preqin said in a report this month.
Surging prices for the best buildings in big cities such as New York and San Francisco are driving the real estate recovery. Centrally located office towers are fetching prices 33 percent above records set in 2008, according to an index from Real Capital and Moody’s Investors Service.
Better Yield
Investors seeking to deploy large amounts of capital quickly can acquire either a trophy tower in midtown Manhattan or multiple buildings in a single deal, with the discount that comes with buying additional properties offering the opportunity for greater returns, said Jim Costello, a senior vice president at Real Capital.
“A portfolio is going to deliver a better initial yield than that office building in New York,” he said.
As values climb, returns are shrinking. For an office building in Manhattan, the capitalization rate — a measure used to calculate the yield on a property investment — has declined to 4.1 percent, the lowest since December 2007, according to Green Street Advisors LLC.
Buyers are widening their sights as they search for enticing deals, said Stanton, who advises Cushman’s overseas clients. That’s making it easier to unload large chunks of real estate that would be cumbersome to sell piecemeal, she said.
Buyer, Seller
For Blackstone, the world’s biggest private equity real estate investor, it’s a good time to be both buyer and seller, said Ken Caplan, the firm’s New York-based chief investment officer for global real estate.
An improving U.S. economy is helping the firm exit investments such as IndCor by drawing foreign investors, while at the same time nurturing acquisitions, Caplan said in a telephone interview. Blackstone has seen its real estate assets under management more than triple to about $93 billion since going public in 2007. The firm has raised more than $15 billion for its new global property fund.
“We’re still quite constructive in the U.S.,” Caplan said.
Lenders are continuing to loosen their standards after pulling back in the wake of the financial crisis, providing funds for larger transactions. Commercial-property owners often carry loans equal to 70 percent or more of an asset’s value, making it difficult for the market to function if investors can’t borrow.
‘Sky-High’
In the portion of the bond market that borrowers often use to fund large real estate transactions, sales of securities tied to such assets as hotel portfolios and individual office towers have tripled this year, with $16.7 billion sold, according to Morgan Stanley. That includes $2.8 billion in bonds used to fund GIC’s purchase of IndCor.
Property owners “are taking advantage of sky-high prices on the best assets,” said Lisa Pendergast, a real estate debt analyst at Jefferies LLC.
The jump in large deals coupled with record-setting prices and cheap credit is invoking memories of the period leading up to the financial crisis, marked by mega transactions such as the $8 billion purchase of Extended Stay Hotels by David Lichtenstein’s Lightstone Group in 2007. That deal, funded with more than $7 billion in debt, was followed by a 2009 bankruptcy of the chain. Some investors are concerned that the seeds are being sown for the next downturn, said Costello of Real Capital.
The difference between the bubble-era deals and today’s transactions is that buyers are putting more cash down for their purchases, making it easier to pay their mortgages and harder to walk away should the economy falter, Costello said.
Lending today is more restrained than it was 2007, said Caplan of Blackstone. Also, he said, a relatively low level of construction is helping keep occupancy levels and demand for space high, and commercial-property values are on firm footing.
“There are a lot of interesting things still to do,” Caplan said.
