Cash Stockpiles, Cheap Debt Spurring Commercial Real Estate M&A Frenzy

Commercial real estate firms are leveraging their stash of pandemic-era dry powder in a spate of mergers and acquisitions this summer.

The value of real estate transactions surpassed 44.2 billion in the first half of 2021 Brokerage houses, REITs and private equity giants are taking advantage of the low interest rates and are seizing the moment to diversify their portfolios, especially in asset classes that are in the midst of the coronavirus Pandemic were successful.

“There’s a lot of money out there, valuations have gone through the roof, bond markets are wide open,” said Steven Siesser, partner at Lowenstein Sandler and chairman of private equity. “There is tremendous activity.”

According to a nationwide financial analysis, S&P 500 companies held 6.3% of their assets in cash last month, well above the long-term average of 3.8%. Companies are blushing after holding on to capital four months ago and acting like “deer in the spotlight,” said Mark Hackett, chief executive of Nationwide of Investment Research.

“They didn’t spend money on anything, but they made profits,” Hackett said. “They piled cash on their balance sheets.”

The Federal Reserve is not planning any rate hikes yet, Chairman Jerome Powell said last month, making large deals more attractive. And as the demand for industrial, multi-family and life sciences real estate has skyrocketed, cap rates have decreased and property values ​​have risen. Housing prices rose 12% year over year in June, and industrial prices rose 9.8%, according to Real Capital Analytics.

“REITs have seen their share prices implode in the depths of the pandemic to rebound strongly with all these positive capital flows,” said Alexander Goldfarb, Managing Partner of Piper Sandler Equity Research.

Retail prices have recovered somewhat from the worst of the pandemic and are up 3.2% since last June. Several publicly traded retail owners have teamed up to take advantage of the economies of scale.

“Scaling out will essentially make the company a more efficient business model,” said Brad Thomas, CEO of Wide Moat Research. “You can see that the growth perks and the cost of capital advantages are the stars coming up for M & As.”

Retail giants have combined extensive portfolios of shopping malls that have performed well throughout the pandemic. Real estate investment trusts Kimco Realty and Weingarten Realty joined forces in April to create a $ 20.5 billion company called Kimco. The merger will combine 559 outdoor shopping centers with grocery anchoring and other assets for a total rental space of approximately SF 100 million.

Grocery-based retail flourished as restaurant traffic declined last year.

“A lot of these malls are anchored in grocery stores, they do well as people spend more time at home,” said Dave Bragg, Green Street co-director of strategic research.

Kite Realty Group and Retail Properties of America teamed up in a $ 7.5 billion deal last month, building 185 open-air shopping centers for a total of SF32 million. Overseas, private equity firms are in a bidding war over UK supermarket chain Morrisons, with Fortress’s latest offer topping £ 10 billion before the deadline next Friday.

Public companies in the hard-hit hospitality and healthcare sectors are also expanding as their businesses recover. REIT Ventas bought New Senior Investment Group, an independent residential community in June, for $ 2.3 billion.

“This will reposition us to be the high-end leisure traveler brand and expand our leisure portfolio to more than 50% of our mix,” Hyatt CEO Mark Hoplamazian said in a statement. “It’s so unusual to buy a platform with so much embedded growth and wind behind it.”

Private equity giants are adding companies in emerging asset classes, assuming their portfolios are undervalued. Blackstone was at the forefront of activity, spending $ 6 billion on rental housing developer Home Partners of America; Savings of US $ 1.75 billion for UK developer St. Modwen; and paying $ 6.7 billion to make data center owner QTS Realty Trust private. Blackstone and private equity player Starwood Capital Group also privatized Extended Stay America hotel chain in June as part of a $ 6 billion joint venture purchase.

Brookfield Asset Management has invested heavily in the purchase of modular workspace and home manufacturer Modulaire Group from UK private equity firm TDR Capital for $ 5 billion.

“Many of these deals are making new highs in terms of ratings for the seller,” said Bragg. “That is probably the number one reason to sell a company at an unprecedented valuation because of the considerations that drive buyers, the amount of equity available on cheap loan terms.”

Starwood is using its deep pockets to propel Sam Zell’s Equity Commonwealth REIT into a bidding war for industrial landowner Monmouth amid sky-high demand for industrial assets. A shareholder vote next week will determine whether the industrial REIT will be privatized.

In addition to the stock market, commercial real estate agents also use cheap bonds to diversify their portfolios beyond the traditional retail, multi-family and industrial sectors.

In June, Savills acquired T3 Advisors, a tenant representative in the life sciences, to strengthen its bona fides in the booming sector. CBRE bought Las Vegas-based investment bank Union Gaming for an undisclosed price and acquired a company that has become a go-to place for gaming giants. This purchase comes after investing in proptech and coworking and creating a purpose-built acquisition company that will take a solar company public.

“I think the trauma of the past 12 months has made people reassess their diversification,” Hackett said. “If you had a strong interest in malls or offices and got beaten up a year or so ago, you want to diversify into some uncorrelated assets.”