Kwarteng: Conditions in 2021 and the first half of 2022 were incredibly conducive for M&A. You had supportive capital markets, fundamentals in many sectors were very sound, valuations for sellers were attractive, and the system was flush with capital. I believe the sectors that have exhibited most resiliency in fundamentals are poised to see meaningful M&A activity in 2023; this will include industrial, self-storage, net lease, and multifamily.
Lazarus : M&A deals are difficult and especially difficult to get right in markets defined by volatility and uncertainty. M&A is about making long-term strategic decisions that require a clear view about what the future environment looks like. Most importantly, in order to fund transactions, REITs will need to use debt which is currently difficult to obtain and very expensive. As volatility subsides, companies will be more confident engaging in M&A, and I would expect the number of M&A deals to increase in 2023.
Weintrob : I do expect M&A volumes to improve meaningfully toward the end of the year. I would expect continued activity in the residential, industrial, and even office sectors over the next 12 to 18 months.
Richford : We expect deal activity to be slow in the first half of the year until there is more asset price discovery and interest rate certainty. For REITs, relative valuations and cost of capital differentials within sectors should encourage consolidation, so there is potential for REIT mergers. Given the massive dry powder in the private market, deal momentum has the potential to pick up significantly in take-privates and large transactions. The return of non-listed REIT capital raising volume would further accelerate deal volume.
Is there any chance for the REIT IPO pipeline to reopen this year?
Lazarus: In a word, yes. Due to declining property prices, 2023 could be the first year since 2009/2010 when a significant number of companies could trade above NAV. We expect this to occur across many sectors where public prices have adjusted and private prices are coming down. Historically, as private prices come down, public prices begin to recover, which provides a window in which value is better in the public markets than in the private markets .
Purcell: There is pent up demand from the buy side for new issuance, and if the right names come to market, investors will show up. Currently, the names coming to market are certainly of higher quality, but there is nonetheless a desire to put more capital to work. As IPOs perform well in the aftermarket, more companies will be enticed to follow suit. Additionally, if private markets seize up and REITs trade at a premium to declining NAVs, we could see an increase in activity.
Richford : I agree, but the IPO window will be very tight. As with any IPO market, this will be available to companies with strong leadership, an institutional mindset, appropriately scaled and capitalized platforms, and attractive growth prospects.
Weintrob : I would expect IPO activity to be back-end loaded. While the public markets lead the private markets down, it is important to remember that they generally also lead the private market up in recoveries, on expectations for improved valuations and fundamentals. I would expect certain issuers to take advantage of a window that opens up to access the markets, and for public market investors to embrace new entrants with attractive and differentiated business models.
Kwarteng : In the last three years, we’ve seen a meaningful decline in REIT IPO activity. Given the expected heightened uncertainty, I expect REIT IPO activity to be low in the first half of 2023. I believe there will be opportunities for well capitalized companies with strong sponsorships to access the IPO market in 2023, especially if there is not a supercharged recovery in the private market.
What trends are you seeing regarding foreign investor interest in U.S. real estate?
Purcell: Foreign investors and likely sovereigns see value in participating in real estate investments given sponsors are on the sidelines and there is limited competition from the REIT universe at this time. They are also generally low levered buyers which positions them well versus the competition.
Weintrob: I do not expect to see any let-up in foreign investor interest in U.S. real estate, in both the public and private markets. The U.S. remains a very attractive investment destination with relatively strong demographics and business environment. That said, the composition could shift, both geographically and by investor type, with increasing flows from individual/retail investors and insurance companies, while we may see less investment than we historically have from China, for instance.
Kwarteng: The U.S. economy is in a much healthier position relative to the global economy, and real estate investment opportunities remain more attractive in the U.S., which suggests that capital will continue to flow into U.S. commercial real estate. We are seeing inflows from not just one region but from multiple countries across the globe. So, while inflows will continue, the reverse is also true—that the recent strengthening of the dollar will make U.S. investors look for opportunities abroad, especially in Europe.
Richford : The U.S. continues to be a favored market in volatile economic times. For transaction volume in the second half of 2022, foreign investors led the charge in many large deals and we expect this to continue in 2023, particularly as institutions outline their capital capacity and allocations to real estate.
Lazarus : The U.S. remains the top destination for capital in the world. U.S. commercial real estate will continue to be a beneficiary of all the great things you get by investing in the U.S. economy through purchases of real estate. In 2022, the rapid and large increase in rates led to a big decline in inbound capital as the dollar became stronger and hedging costs skyrocketed for non-U.S. investors. These costs are moderating as the rate environment is stabilizing.
Traditionally, the large foreign investors have very long term investment horizons, and thus periods of disruption in the U.S. markets provide a better opportunity to buy quality assets at depressed prices in either the public or private markets. We are already seeing increased interest from the Middle East given energy prices and the attractiveness of U.S. assets.
Are there any other notable trends on your radar at the moment?
Weintrob: While transaction activity over the past few years was driven mostly by core investors (funds and institutions/pension funds/sovereign wealth funds), I would expect closed-end value add and opportunistic funds to lead the next wave of transaction activity (which will notably require higher returns and functioning debt markets).
I also expect to see continued interest and attractive fundamentals in some of the hot sectors of the recent past, including industrial, residential, and data centers. The office sector will undergo further fundamental changes that in some respects will mirror what happened to malls over the last decade: there will be demand for fewer assets/less square footage, but a sharper bifurcation (and higher bar) between class A/trophy assets (which will still garner significant demand) and more commodity-like space.
Kwarteng: It’s hard to talk about 2023 and not mention public, non-listed REITs (PNLRs), which for the past several years have been such a dominant factor in real estate. The reported uptick in redemptions in late 2022 grabbed a lot of headlines. It is going be interesting to watch the net fundraising in PNLRs and any resulting impact on asset purchases and sales.
Richford: The real estate market continues to evolve and find new sectors that are attractive consolidation opportunities that can run more efficiently and effectively at scale. There are a few new niche sectors that are very promising and will provide great opportunity for investors.
Lazarus : We continue to monitor the situation with Open-end Diversified Core Equity (ODCE) funds and PNLRs. Many of these vehicles have seen an increase in redemptions at the same time as inflows have slowed. With limited asset liquidity available in today’s market, these companies have limited redemptions. This prevents them from having to be a forced seller of assets in a challenging market. Instead, they have found liquidity in other ways, such as the recent $4.5 billion capital investment by the University of California in Blackstone Real Estate Income Trust (BREIT), which looks like a win/win for both parties.
Purcell: We are tracking two major trends: First, REITs and sovereigns are likely to emerge as partners as access to capital will enable acquisitions and investment financing. Second, from an equity standpoint, we are seeing more investment managers creating private pockets of capital to either invest in private funding rounds for companies or even invest directly at the asset or portfolio level. They recognize the opportunity to earn attractive returns before these entities come to the public market, and then are positioned to be holders once they do.
