Fundraising: Dry powder piles up and competition increases

At the level of fundamentals, real estate continues to be an attractive asset class for both domestic and foreign investors. But overall, the U.S. market is maturing—there is simply too much money chasing too few deals—and this is driving change in the fundraising environment. The largest funds continue to do very well. But for everyone else the fundraising environment is brutally competitive. Consider that historically, it has taken an average of 17 months for a fund to reach final close, but a quarter of funds now have been open for more than 24 months. This slowdown is affecting not just mid-sized funds, but even the smaller, more entrepreneurial shops that have sprung up over the last couple of years. The shift toward European-focused funds is another sign of the increased difficulty of finding good deals here. 

This environment calls for three things from fund managers. The first is maximizing alignment with investor preferences. Most fund managers are still focused on value-add and opportunistic strategies, even as investors are reacting to increased political and economic uncertainty by shifting to core and core-plus. Similarly, investor interest in multifamily and retail has dipped, with office, industrial and mixed use enjoying increased attention. Given the increase in competition for capital, most funds have less leeway then they once did to chart their own course independent of the prevailing investor desires.

Second, funds must have a clear macro-level view of the direction of the market. Record amounts of dry powder combined with a limited number of deals can only push prices in one direction—and the situation is hardly helped by the influx of foreign investors, to whom our compressed cap rates still look good compared to their home markets. Whether or not it makes sense to stay at the table depends a great deal on how much higher you think valuations can go. Investment discipline becomes essential.

Finally, funds need to manage and maximize operating income. Even if you believe valuations will continue to rise, operating income plays an increasingly important role in getting to a 15 percent return on exit. So it is that the quality of a fund’s operating partners has taken on heightened importance, both in the eyes of investors and for the bottom line. 


For more information, please contact Jason Burian, Partner, Commercial Real Estate Industry Practice, at or 312-508-5935.

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