Commercial real estate transactions continue to remain stagnant, with a June 23 report from MSCI tracking a 71 percent year-on-year decline in transaction activity as of the end of May. But advisers and other market participants who have spoken to Real Estate Capital USA are seeing an important but subtle shift in sentiment as a small group of global investors who are interested in learning more about potential investment opportunities is stepping up.
New York-based MSCI tracked an 11.2 percent decline in year-over-year pricing, with transaction volume of $21.1 billion. The data and analytics provider also saw an increase in distressed sales in May.
“By the end of the first quarter, the balance of distress in the US commercial real estate market had grown to $63.7 billion,” the report stated. “Nearly 10 percent of this value was added during the first three months of the year, when inflows of newly troubled assets exceeded workouts by more than $5.7 billion.”
Chinmay Bhatt, a senior managing director and founding member of Berkadia’s joint venture equity and structured capital group, said the New York-based advisory team is fielding more calls and having a greater number of conversations with investors.
“There is capital still out there,” Bhatt said. “There is interest in the right opportunities. What we are seeing is that when there is an exciting deal – be it joint venture equity, preferred equity or some other type of structured capital – capital sources are very willing to jump on planes, go on tours and meet sponsors. That’s the good news.”
The team has strong international relationships in Europe, the Middle East and Asia. “My partner, Noam Franklin, and I spent over a decade collectively working in the Middle East. We are talking to and spending time with not just domestic capital but overseas capital as well,” Bhatt said. “Our recent strategic alliance with Knight Frank has bolstered and enhanced those relationships.
“We are touching a lot of different dealflow across the country and because of our national footprint, capital groups can be in touch with us and get access to deals across the country. For clients who are operating in more than one market, they can work with one team on their entire pipeline.”
Investors continue to be cautious given the uncertainty in the market. “They are doing what they feel is right for their capital – be it a family office, a fund, balance sheet capital or a REIT – everyone is being prudent and cautious,” Bhatt said. “In a market like this, it is all about having the breadth and depth of capital relationships.”
The team is working on a large industrial deal right now and is fielding inquiries from domestic and international preferred equity investors.
“We have a very diverse type of capital and locations in which they are based,” Bhatt said. “It fits the criteria for many types of investors. For the right preferred equity deal, people are getting excited, especially in an environment where a lot of capital groups today have plenty of dry powder.”
The critical component, however, is getting the right deal in front of the right people, Bhatt says. “We have always been targeted in how we approach dealflow and are aware of what capital is looking for. We are carefully connecting the dots. Clients may not be interacting with equity sources on a regular basis because they are focused on their core business. Many clients feel that the equity capital markets are frozen right now, but that is not the case; people are super-selective and very cautious. You have to go to the right sources with the right kind of deal.”
Taking a step back, many of the capital providers with whom the group works have been vocal with Bhatt and his partners, Noam Franklin and Cody Kirkpatrick, that 2020 was a tough year for deployment.
“Most groups were not able to hit or exceed their deployment targets for the year,” Bhatt said. “In 2021, the market was too hot for a period of time and a lot of groups didn’t meet their targets again in 2021. And then in 2022, the year started off at a good pace and then the second part of the year wasn’t as productive as the first.”
This means many of the team’s capital relationships have not met their deployment targets for three years in a row. “Many of them are finding it challenging to find the right opportunities in today’s market,” Bhatt said. “Everyone has one eye on the market and wants to be prudent and cautious with their capital but also are conscious that they have a lot of dry powder.”
Despite the volatility seen in the market today, capital sources from around the world see a solid investment opportunity.
“A lot of groups today view markets like this as an opportunity to meet good sponsors and developers,” Bhatt said. “When the market was very active in 2021 and early 2022, if you were an experienced sponsor or developer, you might have reliable sources of equity already. But today we get a lot of calls from experienced developers and owners who are finding their current sources are quiet now and they want us to run a wider process to find the right capital source for their deals.”