Global M&A Trends in Real Estate

Initial expectations for the 2024 real estate market were that distressed sales would lead market movements, given the volume of maturities, a decrease in real estate valuations, and continued uncertainty in the interest rate environment. The volume of US commercial real estate loans projected to mature in 2024 is estimated to be $600bn, according to MSCI Mortgage Debt Intelligence. The current wall of maturities is more daunting when a similar volume of maturities in 2025 and 2026 are factored in. 

As noted above, global real estate transaction volumes continue to decline. However, bright spots exist, such as the positive news on interest rate cuts. Additionally, lessons learned from the Global Financial Crisis (GFC) are leading lenders and borrowers to consider refinancings and modifications, rather than foreclosure. In doing so, they hope that an extended term will allow for more favorable market conditions to materialise. This trend played out in 2023 as $214bn of US real estate loans that were expected to mature were either modified or refinanced. In Europe, there has been an increase in the volume of distressed sales, but total activity is much lower than the post-GFC years. Globally, many market participants are taking a more solution-based approach to the pending maturities and as such, there may be less opportunities for those looking for significant distress in the market. As a result, investors seeking higher returns will need to look to alternative property types and find alternative sources of capital that are more comfortable with increased risk profiles. 

The real estate sector is evolving as investors search for yield and as the users of real estate assets reevaluate the way they interact with the built environment. The composition of real estate portfolios is also changing, and investor interest in what were previously described as niche asset classes such as infrastructure and student housing is growing. Many of the emerging asset classes are complex and operationally intensive, which affects return expectations, investor reporting mandates and personnel requirements for investment vehicles.

According to MSCI, in the first quarter of 2024, global transaction volume of income producing properties was $130.2bn, a year-over-year decrease of 19%. The decline in volume can be partially attributed to the structural changes in historically significant investment sectors, such as office buildings. As discussed in PwC and the Urban Land Institute’s Emerging Trends in Real Estate 2024 report, there is a painful need for capitulation from the traditional asset classes. 

Technology requirements and housing shortages have resulted in investors shifting their focus and portfolio composition from traditional asset classes to data centers, student housing, and build-to-rent residential. Despite the reduction in overall volume, sales volume in the first quarter of 2024 for alternative sectors increased 41% year-over-year and represented approximately 70% of the total volume during the quarter. 

There is also a growing trend of premium retailers buying up real estate in prime locations across the world to accommodate their luxury goods collections and leverage brand equity to expand into hospitality and residential sectors. The success of more operationally intensive strategies may be necessary to access higher returns in the current interest rate environment.

Exposure to losses from declining commercial real estate values has led to a lending retreat by traditional banks who have been tightening lending standards. This has created opportunities for private lenders to fill the funding gap. According to the IMF, in 2023, total non-institutional lending to corporate borrowers was approximately $2.1tn; that amount is projected to increase in 2024 given the current interest rate environment. 

From a real estate perspective, PERE reports that the largest real estate credit managers have increased their 2024 fundraising goals by approximately 19% year-over-year. Other sources of capital are emerging on the equity side, such as family offices, sovereign wealth funds and non-bank institutions, which have capital available to deploy.

Historically, leverage and a low interest rate environment were often sufficient to generate an adequate return on investment. With the current macroeconomic environment of inflation and higher interest rates, real estate fund managers face a paradigm shift, and they will need to find operating efficiencies and other ways to optimise operations to generate returns and create value. 

The increasing focus on operational effectiveness has caused managers to consider how their existing corporate infrastructure meets the needs of their investment strategies. Additionally, real estate firms are considering new strategies, including ground-up development and real estate credit. This strategy shift requires a realignment of talent with the right skillsets to run new operations. This emerging trend of addressing the talent gap has been observed in recent platform deals such as Pretium’s acquisition of property management platform BH Management Services in May 2024 and talent acquisitions such as Blue Owl’s hiring of the previous Global Head of Real Estate Credit at GIC to lead its newly created real estate lending arm. Strategic acquisitions related to new or adjacent investment theses will be necessary to efficiently drive returns and effectively enter new markets in 2024.