Waiting Capital Could Put a Floor Under Distressed Sales

The vast amount of capital currently sitting on the sidelines of the U.S. real estate market in search of the right deal at the right time and at the right price raises the possibility that it could put a price floor under distressed sales, an analysis by Colliers suggests.

“Investors are sitting on more uninvested capital than ever before,” wrote research director for capital markets Aaron Jodka. “With so much money chasing these deals, someone is likely to bite.”

Some $270.6 billion is ready to be deployed, according to data attributed to Preqin. That includes $100 billion allocated to opportunistic strategies – “the first time any single target allocation has crossed that threshold,” Jodka noted. Value-add and debt strategies make up the balance, putting investors in a good position to capitalize on opportunities that present themselves. Cash buyers are especially well positioned to benefit.

There is already evidence that this is starting to happen. “We are beginning to see this capital put to work higher in the debt stack, where investors can get equity-like returns in a debt position,” Jodka said.

Upcoming loan maturities present another opportunity for investors. According to a recent Newmark report, $626 billion in debt maturing in 2023-2025 is potentially troubled. “Lenders are starting to see assets come back, or they are opening the door to short sales and loan sales,” he noted. “The amount of parked capital available offers a ray of hope and stands as one of the bright spots in the market today.”

The main challenge for investors will be to meet IRR (internal rate of return) hurdles, given the cost of debt, which could keep some of this capital out of play.