Private Capital Chugged Along Better Than Institutional Money Last Year

If the journey of a thousand miles begins with a single step, maybe there is a CRE equivalent. According to Green Street’s Real Estate Alert, for consistency and growth, small was the way to go last year.

“Property sales valued at $5 million to $25 million continued to hold up better than the institutional marketplace in 2022,” the firm wrote. “Some $90.4 billion of private-capital sales closed in 2022, up 7.7% from $83.9 billion in the prior year. The tally is 65.2% higher than the $54.7 billion of smaller sales recorded in 2019, the first year Real Estate Alert surveyed the private-capital space. By comparison, the $25 million-and-over market was down 21.5% year over year and just 25.8% higher than three years ago.”

Two reasons for private-capital sales to grow were hotels and retail. Sales were respectively up 58.5% and 30.4%. “And the office, multifamily, and industrial sectors performed better than their institutional counterparts,” Green Street noted. “That’s not to say the private-capital space didn’t slow down. The fourth quarter saw just $20.5 billion of trades close, down 36% from the 2021 peak of $32 billion. But compare that with the institutional space, where fourth-quarter sales sank 69% year over year.”

The breakouts by property type shifted a bit between 2021 and 2022. For example, self-storage grew from 3% to 4% of the total, and retail went from 20% to 24%. However, multifamily dropped 200 basis points from 30% to 28% and industrial — the other darling during the heavy days of the pandemic — fell from 25% to 21%.

According to what sources from JLL and CBRE told Green Street, it was and still is an opportune time for private capital. Assets in the second half of the year could be had for less than in the first half. And with less competition from institutional capital, private capital groups that might normally look at the property value range of $5 million to $25 million can stretch and consider $40 million to $60 million. The private capital groups, typically getting funding from local and regional banks, which kept lending, also could more easily arrange financing than institutional groups that might look to life insurance and CMBS, areas that got tighter.

Basically, a buyer’s market, though as Kevin Aussef, global chief operating officer for capital markets at CBRE, said, “How long does the buyer’s market last/? Nobody knows.”

It might change if institutional money, concerned about equities volatility, put more money into real estate. Part of this also depends on price points and valuations settling out so there is more predictability. But it’s impossible to know when adequate price discovery will happen, especially as the Federal Reserve continues some tough talk about inflation.