Raising fresh capital for private market assets proved challenging last year. Real estate was hit especially hard, with capital raised falling about 41% year-over-year.
Globally, fund managers collected $98.8 billion across 232 closed-end real estate funds in 2023, representing the industry’s lowest sum since 2012, according to PitchBook’s H2 2023 Global Real Estate Report.
The total capital raised in 2023 marks a 52% decline from the 2021 peak when a combined $207.7 billion was raised across 790 real estate funds, PitchBook data shows.
Squeezed by lower distributions, LPs have limited capital to make new commitments and are more selective about which funds they back, said Lori Campana, a partner at Monument Group who advises GPs on fundraising.
Investors are also reallocating out of traditional real estate investments to other asset classes within the real asset bucket, including energy transition, infrastructure and digital assets, she added.
“LPs will continue to invest in traditional real estate selectively, and they will consider other real asset strategies,” Campana said.
Signs of distress
Meanwhile, distress in the commercial real estate market has crept up in recent quarters as the value of properties has come under pressure from high interest rates and weak fundamentals in various segments.
The office sector has especially struggled amid record-high vacancy rates and elevated borrowing costs. A Moody’s report published in January shows that the US office vacancy rate hit a record-breaking 19.6% in Q4 2023.
Last year, some large real estate investors, including Brookfield Asset Management and PIMCO-owned Columbia Property Trust, defaulted on mortgages on several US office buildings.
Lenders are also increasingly feeling the pinch from their exposure to real estate debt. Several banks this year announced they were setting aside funds for potential losses tied to their exposure to US commercial real estate debt. The list includes New York Community Bancorp, which raised roughly $1 billion from private investment firms to bolster its balance sheet.
UBS, fretting over the growing risks in commercial real estate, marked the downturn in this market as one of the “top and emerging risks” it faces, according to a Reuters report citing the Swiss bank’s 2023 annual report released last week.
The contraction in real estate markets has also strained nonbank lenders’ portfolios. In February, a KKR-operated REIT, Real Estate Finance Trust, which bets on commercial real estate loans, cut its dividend by 42% after it realized a $59 million loss tied to a loan secured by an office property.
Silver linings
Looking ahead, Campana from Monument Group expects real estate fundraising to remain slow this year, with exceptions for certain winning sectors like industrials, data centers and multifamily properties.
Indeed, nine of the 10 largest value-add real estate funds closed in 2023 invest in multifamily, according to PitchBook data.
Multifamily accounted for the largest share—31.8%—of investment sales of all US commercial real estate property types last year, according to the Q4 2023 United States Multifamily Capital Markets Report by Newmark, a commerical real estate adviser.
“There is growing optimism that rate cuts will spur activity in the second half of the year,” the report said.
Featured image by Victor Cardoner/Getty Images
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