The amount of capital raised by real estate private equity funds shrunk from $35 billion in the fourth quarter of 2018 to $18 billion in 2019.
Real estate private equity funds raised $18 billion in Q4 2019 — a $17 billion decline from the previous year and the smallest amount raised since 2013.
PJT Park Hill Real Estate Group Co-Head Michael Stark told WSJ venture capitalists are becoming more discerning with their pockets as return on investments slim down due to softening property value growth.
“The market is not providing as many clear opportunities to hit those high return objectives like it once did,” Stark said.
Although most firms trimmed the fat in Q4, WSJ noted Blackstone Group and Brookfield Asset Management ramped up the activity with a combined $35.5 billion in closed funds. In Q3 2019, Blackstone closed a $20.5 billion fund for commercial and industrial properties that include office buildings, warehouses and stores while Brookfield closed a commercial property fund worth $15 billion.
While returns in the commercial realm have slowed, investment firms are still finding success in the residential rental market as rent growth surpassed 5 percent in the nation’s hottest markets during the last part of the year.
Salt Lake City-based Bridge Investment Group and Charleston-based Greystar Real Estate Partners closed $1.6 billion and $2 billion funds in Q4 2019, respectively. While Bridge’s portfolio is limited to the United States, Greystar has expanded its reach to France, Germany, Ireland, the Netherlands, Spain, the United Kingdom and Mexico.
Although Bridge and Greystar have found success in the rental market, WealthFront CEO Andy Rachleff explained in blog post that investors should think twice before placing their bets and pockets on this segment of the real estate market.
Rachleff said a lack of guaranteed income, low returns, lack of diversification and lack of liquidity make investing in rentals, especially single-family rentals, a dangerous gamble.
“Generating a compelling return on an investment property requires significant appreciation,” Rachleff told Inman. “Investing in a risky asset class like real estate requires diversification to generate a higher long-term return because you never know when a particular real estate strategy or type of property will fall out of favor.”
Despite the slowdown at the end of 2019, industry insiders told WSJ investing efforts will rebound in 2020, thanks to historically-low interest rates and rising stock values. However, firms are still expected to take a more conservative approach that includes focusing on increasing cash flow through rent growth and cost cutting.
“I notice in our conversations with investors that there’s even more of an air of caution than we’ve seen in the last few years,” Fortress Managing Director Todd Ladda said.
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