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Private Equity Looks for Real Estate Opportunity

January 2014

The following was distributed as part of the Real Estate Private Equity Fund - Fourth Quarter, 2013 newsletter.

Tired of investment yields that are not much higher than inflation, investors are no longer  exclusively expending their efforts on buying top properties in top markets. Instead, they are looking for opportunistic strategies through higher yielding real estate investments in secondary markets, secondary property types, and new development such as land or challenged properties in need of repurposing.

“Land transactions are up significantly,” says Dan Fasulo, managing director for Real Capital Analytics. So far this year, buyers have purchased $11 billion in developable land, up almost one third from a year ago, according to RCA.

Most of the planned development is multifamily construction in locations ranging from urban high-rise buildings to garden apartments, mostly in core markets, where strong, proven demand should suffice to fill the space. Funds are also developing new commercial properties built to suit the needs of a single tenant who has committed to occupy the space. Funds are also investing in development.

Smaller, more flexible funds are achieving higher yields with opportunistic, value-added strategies that reach far beyond simply buying an old, class-B or C apartment building and attempting to upgrade it to a class-A, a strategy more common earlier in the recovery. Investors now often redevelop older buildings to suit new purposes, such as converting old offices to luxury apartments, retail, creative, tech or hotel space. Smaller private equity funds have more freedom to pursue opportunistic strategies, because their small size gives them flexibility as well as a far larger number of local and regional deals to explore.

Secondary markets, secondary property types draw investors

As investors are turning their attention to secondary property markets, in the first half of 2013, the dollar volume of apartment properties bought and sold by investors doubled in secondary markets like Orlando, Fla.; Las Vegas, Nev.; and California’s Inland Empire compared to the year before, according to data from Real Capital Analytics.

Over the same period, investors were less interested in chasing after the strongest properties in safest markets. The yields on these investments is no longer lucrative enough. The number of apartments bought and sold in New York City fell by a third, although prices, property fundamentals and cap rates remain strong. The volume of apartment properties bought and sold also decreased in top markets such as Los Angeles and San Francisco, and even in strong secondary markets like Raleigh Durham, N.C., and Austin, Texas, where prices are already high compared to income from the properties.

The hunt for returns is also leading investors to property types that can offer higher yields than apartments, although property fundamentals may not be as strong as multifamily. For example, investors including Blackstone are making significant purchases of suburban office properties, which had fallen out of favor since the economic downturn. These properties are not expected to suddenly improve in their fundamental strength—the rental income produced by these properties is directly linked to the weak overall health of the uncertain U.S. economy and continued, persistently high unemployment. However, even at their current level of operating income, these secondary property types provide a strong investment yield compared to apartments, and investors are expected to continue to invest in them, bidding up property prices.

Institutions buy industrial

Large institutional investors have aggressively jumped into the market for high quality industrial assets that are well situated near major transportation routes, according to Reis, Inc. Blackstone, for example, has grown its portfolios of U.S. warehouse and distribution centers into one of the largest in the country. In August, Blackstone bought a portfolio of warehouse properties mostly into the Reno, Nev. area from Lehman Brothers Holdings. CalPERS is also expected to become more active in the warehouse/ distribution market, according to Reis.


For more information, please contact George Klenovich, Partner, at 312-508-5859.

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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