Second Half Looks Better for Private Equity Deal Flow

Inflation and interest-rate volatility have spooked investors, according to Green Street Broker Report.

By Paul Bergeron | August 31, 2022 at 07:58 AM

A slowdown in institutional real estate deals (those of $25 million or more) due to inflation and interest-rate volatility has private-equity investors poised to have “rosier expectations” for the second half of the year, according to Green Street, a commercial real estate analytics firm.

Its Mid-Year Broker Rankings report issued this month reported that the first half of the year featured record-breaking sales of smaller properties totaling $44 billion, a 49% year-over-year increase.

In the institutional segment, sales rose 56% in the first six months of 2022, according to Green Street.

Green Street spokesperson Stacey Corso, tells GlobeSt.com, “Both segments, however, have seen deal flow decline during the past two months as inflation and interest-rate volatility have spooked investors and pushed down valuations. That said, brokers see more willingness to transact in the private-capital space amid the unpredictable macroeconomic environment.”

Private Market ‘Manages Change Better’

“This is a movie that we continue to see in every cycle,” Kevin Aussef, global chief operating officer for capital markets at CBRE, said in the Green Street report. “The larger transactions slow down a lot quicker than the smaller transactions. It’s just the nature of the private-client market.

“I can’t say we’ve weathered the worst … but relatively speaking, when it gets cold out there, the private market manages that change better in terms of its resiliency. Private clients are still out on the streets — and they transact.”

Institutional Capital ‘More Patient’ Right Now

John Drachman, co-founder, Waterford Property Company, tells GlobeSt.com, “Smaller projects are less impacted by the capital markets issues as there has been more 1031 Exchange capital being used to acquire projects and more all-cash buyers as well.

“Eventually that trend should reverse and sub-institutional deals will feel the impacts of what’s happening in the capital markets similar to institutional deals.

Institutional capital is being much more patient/cautious right now than private capital is being.  The challenge will be if the economic environment begins impacting real estate projects in a major way, smaller projects will feel it more.”

For example, Drachman said, “with our projects, if within a 500-unit apartment building, a few tenants vacate the property, it does not move the needle much. In say a 50-unit project, when a few tenants vacate you feel it immediately in terms of your cash flows.”

Finance Landscape ‘Growing More Difficult’

Paul Fiorilla, director of research at Yardi Matrix, tells GlobeSt.com that “growth is sure to slow as the pandemic stimulus windfalls shrink and higher prices erode consumer purchasing power. The full extent of the deceleration—whether and when it leads to a recession and how deep the recession extends—is very much in doubt.

“The impact on debt markets depends a great deal on how the economy performs in coming quarters and whether the Fed successfully manages to slow inflation without creating a sharp recession. However, the scene plays out, clearly, the landscape is growing more difficult for the industry compared to the consistent growth of the past decade.”