{"id":1004741980,"date":"2025-01-06T00:34:31","date_gmt":"2025-01-06T08:34:31","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004741980"},"modified":"2025-01-24T07:00:09","modified_gmt":"2025-01-24T15:00:09","slug":"stars-align-for-cre-secondary-funds","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/stars-align-for-cre-secondary-funds\/","title":{"rendered":"Stars Align for CRE Secondary Funds"},"content":{"rendered":"\n
\"Fragmented<\/a>
Image by Adobest\/iStockphoto.com<\/em><\/figcaption><\/figure>\n\n\n\n

High interest rates, slumped property valuations and maturing debts across commercial real estate have weakened investors\u2019 appetites. Altus Group<\/a> reports that as of the third quarter of this year, transaction volumes were at their lowest point since 2013, while the total square footage that traded was at a nearly 15-year trough.<\/p>\n\n\n\n

In contrast, general partner-led secondaries funds are feasting on the opportunity to acquire equity interests in real estate assets and funds from existing investors. Blackstone, Goldman Sachs and Lexington Partners are some of the bigger names forming secondary vehicles, but institutional investors, pension funds, family offices and sovereign wealth funds across the globe are also partaking as fund managers or fund investors.<\/p>\n\n\n\n

\n
READ THE MAGAZINE<\/strong><\/a><\/div>\n<\/div>\n\n\n\n

PJT Partners, an asset advisory and fundraising services firm, reports that real estate secondaries funds have raised nearly $12 billion in capital over the past seven quarters. In the first half of 2024 alone, $3.4 billion was raised, accounting for 6 percent of all capital raised for closed-end real estate funds, the highest portion of total fund closures since 2019.<\/p>\n\n\n\n

Secondaries enable investors to gain a stake in premium assets at a discount while fund managers get the liquidity and stability that\u2019s hard to come by today.<\/p>\n\n\n\n

The perfect storm<\/h2>\n\n\n\n

With limited partners not realizing expected distributions from funds, which on average are down 70 percent since their peak, investments from secondaries have an irresistible appeal for fund managers. \u201cWhen (transaction) volumes are slow, it means investors are not getting the normal distributions, which puts them in an illiquid position,\u201d said Jeff Giller, partner & head of real estate at StepStone Group, which recently closed on a $7.4 billion secondaries program focused on the private equity sector.<\/p>\n\n\n

\n
\"Jeff<\/a>
Jeff Giller<\/figcaption><\/figure><\/div>\n\n\n

This is happening while real estate owners are having to service higher interest rate debt or refinance existing properties with less proceeds than their existing loan payoff amounts. S&P estimates that more than $950 billion worth of commercial mortgages are set to mature this year, increasing by more than $300 billion by 2027. It\u2019s a perfect storm.<\/p>\n\n\n\n

\u201cManagers are unable to raise capital by selling their assets, (some) loan levels are down and some lenders are out of the market entirely,\u201d observed Giller.<\/p>\n\n\n\n

And these difficulties don\u2019t account for other worrisome macroeconomic trends or sector-specific struggles, such as hybrid work<\/a> for office and supply-chain slowdowns for industrial.<\/p>\n\n\n\n

\u201cBecause of the pandemic, a number of managers across all asset classes decided to extend their funds\u2019 lives because it wasn\u2019t the right time to sell,\u201d according to Achal Gandhi, CIO & head of indirect real estate strategies at CBRE Investment Management. \u201cAfter that, we had an inflationary spike and an interest rate cycle, where managers said the same thing.\u201d <\/p>\n\n\n\n

How investors stand to benefit<\/h2>\n\n\n\n

But what\u2019s in it for the secondary investors? For starters, secondaries allow them to purchase otherwise inaccessible assets on a discounted basis. A February 2024 study from Neuberger Berman found that real estate secondaries reported a sub-75 percent discount<\/a> to net asset value from 2022 and 2023.<\/p>\n\n\n

\n
\"Elizabeth<\/a>
Elizabeth Bell<\/figcaption><\/figure><\/div>\n\n\n

In the longer term, this means higher gains. \u201cIt\u2019s a good J-curve mitigant,\u201d said Elizabeth Bell, managing director & co-head of real estate at Hamilton Lane. \u201cYou can immediately step into a fund and get access to mature assets at a discount, and that\u2019s a great entry point.\u201d<\/p>\n\n\n\n

This even goes up to the portfolio level, where an LP\u2019s need for liquidity may cause them to sell off entire collections of assets.<\/p>\n\n\n\n

GP-led secondaries typically allow the investor to conduct more due diligence on the assets in the funds they\u2019re investing in. \u201cYou\u2019re not buying out the GP, because you depend on their knowledge and expertise to manage the assets, but you are getting access to the assets at somewhat of a discount by infusing new capital to help the GP create opportunities and solve problems,\u201d Giller explained.<\/p>\n\n\n\n

What\u2019s more, secondaries by nature gain an equity stake in existing assets, sidestepping<\/a> contentious development and debt structuring processes.<\/p>\n\n\n\n

In turn, you \u201ccan expect a shorter time horizon to reach stabilization, quicker liquidity and less exposure to market volatility vs. traditional funds,\u201d according to Brian Di Salvo, partner of capital advisory at Park Madison Partners.<\/p>\n\n\n\n

\"Strong<\/a>
Source: PJT Park Hill<\/figcaption><\/figure>\n\n\n\n

Areas of interest<\/h2>\n\n\n\n

The preferred investments are \u201cthose that have continuing economic and upside potential,\u201d said Ron Dickerman, CEO of Madison International Realty, which is in the process of raising capital for its ninth secondaries fund. On the flip side, risks such as low vacancy, expiring debt or a large lease maturity would disqualify a potential secondaries investment, according to Dickerman. Therefore, office properties take a back seat to other property types.<\/p>\n\n\n\n

The potential lies almost entirely in assets benefiting from growing demand for consumer goods ranging from groceries to electronics, services and computing power. In the industrial sector, which has posted some of the largest payouts<\/a> of all asset classes, Madison and other firms focus on cold and outdoor storage, intermodal, single-tenant<\/a> and small-bay facilities. Dickerman is motivated by demand for delivered groceries, which is expected to grow nearly tenfold<\/a> by the end of the decade.<\/p>\n\n\n\n

\n

Investors Go Big On Secondaries<\/h2>\n\n\n\n

For example \u2026<\/p>\n\n\n\n