With the Federal Reserve raising interest rates again on Wednesday, the debt-laden deals that whipped the commercial real estate sales market into a record-setting frenzy last year have all but disappeared.
Overall investment sales transactions are down by half year-over-year, but for sellers who need an exit, they increasingly have one place to turn: all-cash buyers.
Sovereign wealth funds, international fund managers and the family offices of billionaires have grabbed a much larger share of the sales market in recent months, and experts who spoke to Bisnow said they will continue to be in the driver’s seat until borrowing costs stabilize.
“Equity has a high value now, which was not the case over the last couple of years,” Henning Koch, the CEO of German investment firm Commerz Real AG, told Bisnow this week. “We believe we can play our strengths now much better.”
Koch said, as an all-cash buyer, it is easier to close deals now than it was a year ago; for investors that are willing to stay active during this time, the opportunities have multiplied. After competing with the whole “investor universe” a year ago, Koch said the environment Commerz can play in now is much simpler.
JLL Chairman of New York Investment Sales Bob Knakal told Bisnow that 25% to 30% of the deals he’s working on today are with all-cash buyers, with the majority of those bids coming from foreign investors. He said pre-pandemic, that share was something closer to 10% to 15%.
“There aren’t a ton of investors willing to put up all equity, but there are enough that if you can get one, it’s very attractive for a seller,” Knakal said. “If you have somebody that you know has their own money and they’re not going to go to a bank, they’re not relying on a third party, that’s attractive, that’s less uncertainty there.”
Some of the splashiest deals in major markets this year have sold to all-cash bids from foreign investors. In New York, the son of Canadian billionaire Francesco Bellini acquired the former AIG headquarters in Lower Manhattan for $252M, and Pontegadea, owned by Spanish mogul Amancio Ortega, acquired a Financial District multifamily property for $500M.
In Washington, D.C.’s largest real estate sale of the year so far, Japanese real estate developer Mori Trust dropped $531M on Boston Properties’ 601 Massachusetts Ave. in September. The 460K SF building attracted solely all-cash buyers as the REIT was looking for offers, BXP Executive Vice President Jake Stroman, co-head of the D.C. region, said at a Bisnow event Sept. 29.
“If there were a leveraged buyer, they didn’t participate,” Stroman said. “The buyer pool for that asset was much smaller than what would’ve been typically seen two or three years ago.”
“This is one of those ‘cash is king’ situations where borrowing costs are higher, and if you’re an all-cash buyer, those probably represent a disproportionate share of the people in the market today,” a partner at a “leading advisory firm” said in the ULI report, which anonymously surveys CRE executives.
Byron Carlock, U.S. real estate practice lead at PwC, said many types of investors are looking at real estate as the global economy teeters closer to recession, but buyers who would need to leverage their deals with debt are having more trouble transacting.
“We’re seeing the entry of high net worth and ultra high net worth buyers who see real estate as an inflation hedge,” Carlock said. “I think there will be a niche that continues to play in the all-cash space, and wait for the financing markets to normalize.”
While experienced leveraged buyers are watching property values decline — Green Street found U.S. commercial real estate prices fell 1% over the previous 12 months in September, but projected prices to keep dropping — the fast-rising cost of debt is keeping many sidelined.
“Market insiders who have been around to see a lot of cycles, they’re like, ‘Yeah, that’s super-attractive. I just can’t take advantage of it right now,’” said Janice Stanton, who runs Cushman & Wakefield’s capital markets global advisory group. “Others, the Commerzes and the other German investors, are looking as well and saying, ‘You know, I was under-allocated, it was hard to buy something [before], now’s the time.’”
Stanton said all-cash buyers she works with aren’t necessarily targeting dislocated properties like offices and hotels or secular standouts like industrial and multifamily. Rather, they are searching to balance their portfolios while the market favors the buyer.
That could mean an institutional investor snaps up an office property whose price has fallen, believing its value will likely rise over the course of an entire economic cycle. But it could also include industrial, life sciences or multifamily properties, Stanton said.
“There’s a bigger repricing going on in office than multifamily. But investors, they hear that and they act on it, but sometimes they also say, ‘I hear you, and we’re really into this or that, but we’re underweighted,’” Stanton said.
“It’s rare that the all-cash guys stay all-cash throughout the life of the investment. They just have the horsepower,” Mitsanas said. “Ultimately, whether it’s the day after they close or six months after they close, they’re going to repatriate.”
That was the case for Commerz Real, which has since attached debt to its 100 Pearl St. buy, Koch told Bisnow.
While there are all-cash buyers like Commerz, Pontegadea and Mori Trust that are willing to bet on their value conviction in the middle of a volatile market, many others who can transact are waiting for prices to sink even lower. Experts don’t expect a déluge of year-end transactions, even among all-equity buyers.
“We’re at a stalemate, it takes time,” Mitsanas said. “And I think if interest rates do stay high, the dam starts breaking the first or second quarter of this year.”
Koch said because Commerz is a long-term owner of real estate, it can act more independently of economic cycles and invest when competition is low — like right now.
“Usually, people believe it’s still very cheap, but then two months, three months later, it’s much more expensive and if you’re not quick enough, you haven’t secured the deal,” Koch said. “I think you need to be a little bit brave, but also a little bit clever when looking at your investment horizon.”
C&W’s Stanton said there is plenty of equity parked on the sideline, with potential buyers waiting to snap up deals once prices hit rock bottom. But those buyers may be surprised to find greater competition than they expected when they return to the field.
“Because there is so much dry powder, once the Fed says, ‘Hey we’re done,’ everyone’s back in the pool at the same time,” Stanton said. “The people who are buying now are going to be well along and getting some good deals, but the people that are waiting … are going to be surprised by the fact that when they’re ready to get in, everyone else is, too.”