Berkshire Global Advisors: Real estate M&A will return in earnest

Mergers and acquisitions are down as the market stalls, but stake sales are still happening, albeit more slowly than usual, says Drew Murphy, partner and head of real estate at Berkshire Global Advisors.

The US commercial real estate market continues to face challenges post-pandemic, but the picture is not uniform. Parts of the office sector have come back, but the remote and hybrid working revolution impacting the market appears permanent. Other areas that suffered during covid, such as retail and hotel, have rebounded, while industrial and logistics, which never faltered, remain solid.

Drew Murphy

Dealmaking in the real estate advisory sector is naturally reflecting this uneven marketplace, as well as larger macroeconomic concerns as interest rates remain high. Through Berkshire Global Advisors’ window into sentiment on both sides of the negotiating table, we can report that discussions are occurring, and firms with a particular focus on industrial, residential and real estate credit are drawing attention. Parties that have had a prior relationship are more likely to engage with one another. 

That said, the deal engine has stalled for the moment. Through the first three quarters of 2023, there have been 11 real estate mergers or acquisitions, compared with 28 for all of 2022, which was an active year. The larger private markets arena has also experienced a drop in dealmaking, albeit on a less pronounced level: there were 38 transactions in the first three quarters of 2023 compared with 65 in full year 2022, which was also a busy period.

A variety of factors are responsible for the slowdown. For one, buyers are weighing the timing of an acquisition while acknowledging the opportunities ahead with asset values resetting and upcoming vintages poised to potentially deliver strong performances. That streak of ambivalence can lead to inaction, however. Add to that a new wrinkle which is slowing the process even among interested buyers: due diligence is taking longer than ever. 

In short, M&A timelines are getting stretched out, averaging 12 to 18 months now. By comparison, two years ago, deals would generally take six to nine months to complete. “Twelve months ago we would’ve done the deal,” one buy-side client told me recently. “The strategic fit is there, and we think it’s an opportune time to establish yourself in this space, but there are just too many internal hurdles and other priorities distracting us now.”

On the sell side – and negative real estate headlines aside – while the investment managers we interact with may have some assets in their portfolios they are keeping a close eye on, neither their portfolios nor their businesses as a whole are troubled; managers are not under duress to sell. Additionally, for those managers engaged in fundraising, consideration of a sale is on the back burner. 

That said, some potential sellers appear to be mulling minority stakes rather than more aggressive controlling ones. One such manager conveyed to me recently that, given his firm’s strong growth prospects, bringing on a minority partner to help with general partner capital, reorganizing the capital table and providing some strategic capital formation makes the most sense right now.

Drivers remain intact

While we do not have visibility on a timeline, dealmaking will ultimately revive, driven by the same factors that have led participants to the table for years. On the sell side, bringing in a partner can accelerate growth and assist with succession planning, while among buyers there is demand for product, as real estate remains a core part of institutional portfolios.

Individuals expanding beyond the traditional 60/40 equity-bond portfolio into real estate and other alternatives are also on managers’ radars. Blackstone, with its significant wealth platform, notes these investors in general have only low single-digit allocations to alternatives, leaving plenty of room for growth.

With an eye on that retail market, wealth aggregator Focus Financial Partners in January acquired Origin Holding, a specialist in multifamily that manages $2 billion in assets for high-net-worth investors through three private funds. Focus wrapped Origin into one of its affiliates with the aim of extending the products to its large network of partner firms.

For both buyers and sellers, scale is another ongoing factor driving deals. Scale provides the distribution and marketing muscle required to attract new institutional investors worldwide, as well as the multitude of retail investors. Scale also fuels general partner fundraising and the investment needed to remain competitive in technology, personnel and other internal areas.

In a related vein, institutions simplifying their rosters of managers are gravitating to large and diversified firms that can serve up a wide range of alternative asset classes and solutions.

One industry participant said he believes the number of private market fund managers of consequence will number just 100 in another 10 years. Accordingly, private equity and credit firms seeking to replicate the broad portfolios of their large competitors are logical buyers of real estate platforms. Traditional asset managers expanding into alternatives remain potential buyers of real estate managers as well. 

While bilateral or limited process discussions are occurring, they are taking longer than usual and are arguably more strategic in nature. Independent firms, patient and solvent, say factors such as culture, the integration plan and their autonomy, the interests of stakeholders and financial terms remain as important as ever. Both sides are asking, “Can a partnership accelerate existing plans?”