A look back: Madison International Realty

For the New York-based private equity real estate firm, low interest rates helped to drive its 2015 deal flow in a not so obvious way.

In 2015, a commonly heard theme in the US was the concept of ‘lower for longer’ – that interest rates were expected to stay low for an extended period of time. That wasn’t welcome news for everyone in the private equity real estate industry, said Ronald Dickerman, president of Madison International Realty.

“What we’re finding is under the surface, there’s a fair amount of deal fatigue,” said Dickerman. Many investors have owned properties in illiquid structures that were formed in 2002 through 2004 and were intended to be eight-year to 10-year vehicles. Fast-forward to today, however, and the hold periods for many of these investments have extended into years 10 through 14, he said. But while investors expected those assets to have been sold by now, managers have continued to hold these properties to capture more of the upside from a growing economy and rising rents.

Some investors have not shared the same view. “If you’ve owned something for 10 years to 12 years, you feel like it’s time to rebalance or to invest in other situations,” said Dickerman. “That’s what we see driving a lot of the property sale activity.”

Deal fatigue has been mounting over the past few years, beginning in the summer of 2013, when the US Federal Reserve first announced that it was ready to step away from its quantitative easing program. Fund sponsors responded by informing their investors of plans to sell their buildings over the next six months to 12 months to avoid rising interest rates and potentially rising cap rates. Until this month, however, a rate hike hadn’t happened – and neither had the property sales.

“When investors start to get a taste of liquidity, the idea that we are going to sell this, and then it doesn’t happen, they start to get grumpy and tired,” said Dickerman. “So we’ve gotten approached with dozens and dozens of transactions from the sponsors of funds that are at the end of their life.”