Where Is The Dry Powder?

We keep hearing the refrain that there’s billions of dollars sitting on the sidelines for commercial real estate. Well if that’s true, then why is it so hard to raise capital in the current environment? Every investor and every developer I speak with is saying that investors are sitting on their wallets. 

There is a substantial amount of dry powder available for commercial real estate investment across various firms, with London-based investment data company Preqin putting the number at more than $350 billion. Much of it is held by the largest private equity and alternative investment firms, including Blackstone, Brookfield Asset Management, Ares Management, KKR, Carlyle Group, Apollo Global Management, TPG Capital and Starwood Capital Group.

Much of the dry powder was raised three or more years ago and has been left unspent. Funds often have set periods during which they must spend money they've taken in from investors, and that deadline is approaching with many companies showing new signs of activity.

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Episode Transcript

(00:01):
Welcome to the Real Estate Espresso podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash. We keep hearing the refrain that
there's billions of dollars sitting on the sidelines for
commercial real estate. Well, if that's true, then why
is it so hard to raise capital in the current environment?
Every investor and every developer I speak with is saying
that investors are sitting on their wallets.

(00:22):
During the middle of the pandemic, we saw two major
effects happening simultaneously. 1st, as we saw
demand for rental housing spike during the pandemic and we saw
office demand plummet in 2020 and 2021, there was a gold rush
into apartments. The same time, we saw a
significant price inflation and a spike in interest rates
starting in 2022. Back then, I was not the only

(00:43):
one predicting an overheated market and eventual distress in
the office market and in multifamily apartments.
Major players raised billions ofdollars waiting for the distress
to hit the market. They were often called
opportunity funds, which is basically code for a vulture
fund. Uninvested capital held by these
investment funds grew to recordsin 2022 and 2023 at a time of

(01:04):
high interest rates and weak demand for deals.
While some was invested last year, much of that money has
remained on the sidelines in early this year as executives
have tried to figure out what the Trump administration's trade
policies are going to mean, federal tax changes and impact
of foreign policy. All of this comes from 2 reports
from real estate consulting firms Price Waterhouse, Coopers

(01:24):
and Bain and Company. A recent Co Star News report
agreed with that characterization in the reports
and from Bain, they said that the pressure is mounting within
the industry to utilize those funds and source fresh new
capital. So there's nothing fundamentally
broken about the market. Buyers and sellers can still
transact, and history shows thatstrategic buyers with a strong

(01:44):
M&A agenda are remaining active even in the current market
conditions. In any disruption, there's
winners and losers, and the bestopportunities often come in
moments of extreme uncertainty. And that's still true of this
year. There's a substantial amount of
dry powder available for commercial real estate across
several different firms. A london-based investment

(02:04):
company called Prequin is putting that number at more than
$350 billion. Much of it is held at the
largest private equity and alternative investment funds,
including Blackstone, BrookfieldAsset Management, Apollo Capital
Management, The Carlyle Group, KKRTPG Capital and Starwood.
Blackstone leads all the privateequity firms and available

(02:26):
capital. They currently have 177 billion
to spend globally, although theydon't break out the North
American portion of that total. 1 Blackstone Fund The Blackstone
Real Estate Partners fund has 181/2 billion dollars to spend,
according to Costar, Blackstone recently completed a $4 billion
acquisition of Retail Opportunity Investments in
February. In the same month, Apollo

(02:48):
announced an agreement to acquire Bridge Investment Group
for 1 1/2 billion dollars. These deals were driven,
according to the companies, by factors including perceived
bottoming of real estate valuations combined with reduced
new supply in some sectors due to higher construction costs and
the opportunity to invest when others have been hesitant.
That activity in the first quarter was weakened as economic
headwinds triggered by tariffs and the global trade war have

(03:10):
emerged in this quarter. Despite the uncertainty, several
firms have expressed optimism about making property
investments, particularly later this year.
And when you think about it, real estate's a pretty simple
business. It's determined by supply and
demand, the cost of capital and the cost of construction.
The good news is new supplies down dramatically from where it
was a couple of years ago. And interestingly, tariffs might

(03:32):
mean it will be more expensive to build, so there will be
perhaps less new supply. In addition, the cost of
capital, which went way up back in the fall of 2023, is started
to come down a little bit now. In addition to the markets
hitting bottom, if not improvingslightly, there's added pressure
on the part of these private equity firms to spend that pent
up capital, that money that's just sitting on the sidelines.

(03:54):
Much of it was raised three or more years ago and it's been
unspent. Funds have typically a defined
period in which they have to spend the money that they've
taken from investors, and that time is running out.
More than 63 billion of dry powders held in funds formed
three to five years ago, according to Costar.
Blackstone, Brookfield and Ariesare the largest holders of that
capital, which at the moment combined totals about $29

(04:16):
billion. Many of these funds have seen
redemption requests increasing, meaning investors want their
money back. Starwood has seen significant
redemption requests and that enforce them to freeze their
redemptions and in fact start selling some assets in order to
meet those redemption requests. On average of flows, that is,
investors selling shares have been higher than new fundraisers
for the last 10 straight quarters.

(04:38):
So the dry powder at these closed end funds that raise
capital and offer investors a fixed number of shares is
actually down a fair bit from the peak in 2022.
It's down 13%. So while there is less dry
powder today than in 2022, there's still a ton of cash on
the sidelines. The pressure to spend is ramping
up the competition for deals. Seems like these funds were
sitting on the sidelines waitingfor the bottom, and as soon as

(04:59):
the market hit the bottom, or atleast that bottom became
visible, they're all rushing back into the market at the same
time. That could have the effect of
raising prices and ultimately driving lower returns for
investors. So these equity funds, they want
to deploy the capital. In fact, they need to deploy the
capital in order to earn a rate of return for the investors.
They also need the deals, though, in order to deploy the

(05:22):
capital. The issue is that when there's a
strong offering, there's also strong competitive demand for
that product and that can slow down the deal making for those
trying to deploy capital where they have a very specific
internal rate of return. Target funds with lower
profitability goals typically can pursue A wider range of
investments, and they're actually getting more deals.
So while industrial properties have dominated private equity

(05:45):
investments over the last coupleof years, that's showing signs
of saturation, We're starting tosee a shift towards other
alternative property types. That includes data centers that
are very hot right now. Healthcare properties are also
seeing strong demand and continued interest.
The Costar report also lists student housing as a strong
segment, which I frankly disagree with and I covered in
some detail on yesterday's show.So based on that, we may see a

(06:07):
resurgence in investment in the second-half of this year as a
lot of these closed end funds focus on deploying capital.
As you think about that, have anawesome rest of your day, go
make some great things happen, and we'll talk to you again
tomorrow.