Ares Management’s senior executives believe the global real estate industry is on a path to recovery after an uncertain period driven by macroeconomic and geopolitical volatility.
Speaking during Ares Management’s first quarter earnings call, Jarrod Phillips, chief financial officer, said the firm continues to see “positive fundamentals in our real estate portfolios, and we’re beginning to see signs of a market recovery.”
Michael Arougheti, chief executive of the Los Angeles-headquartered firm, added that operating fundamentals continue to be sound in their highest allocated sectors, particularly within industrial, multifamily, student housing and single-family rental.
“The strength that we’re witnessing is not exclusive to the US,” he added. “European markets are experiencing a moderate rebound in activity across the continent and the economies of the Asia-Pacific region are showing signs of growth.”
In the first quarter of the year, Ares Management invested $300 million in US real estate equity and $200 million in real estate debt, out of an aggregate $1 billion in real assets deployment. As of March 31, the firm reported an AUM of $28.7 billion in US real estate equity, $9.2 billion in European real estate equity and $10.9 billion in real estate debt.
“In real estate, transaction activity is improving, and our pipeline is growing, driven by our substantial dry powder, more economic certainty and compelling market values,” Arougheti said. “We’re seeing low double-digit return opportunities in senior debt, mid-teens return opportunities [in] funding the gaps within capital structures and intriguing equity opportunities, primarily in our core sectors of industrial, multifamily and student housing.”
Arougheti also added that Ares expects 35 different funds across its investment strategies to come to market this year, including the firm’s fourth European value-add real estate fund and its eleventh US value-add fund.
The firm is currently in market with its latest real estate credit fund, which is seeing “good momentum,” he said. “In this rate environment, you have high-quality assets that are owned by high-quality institutional owners, that are upside down on their debt service and need some form of opportunistic credit solution to ultimately realize value on their real estate holdings. And so, we’re seeing a significant amount of what I would call opportunistic debt opportunities in both the US and Europe to support that investment thesis.”
Given some of the challenges that US banks, particularly regional banks, are facing with their balance sheets, he expects two potential outcomes. One is more market share to shift from banks to nonbank lenders. “I think that we can be a much larger participant in new issue volumes as those markets heal,” Arougheti said.
Another outcome on which the firm expects to capitalize is more portfolio acquisitions and opportunistic deals to come off bank balance sheets, he added.
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