Dynamic dealmaking: KKR capitalizes on ‘shallow capital markets’

The New York-based manager is striking deals with sellers that are proceeding quietly on sales and shortlisting the firm as a potential buyer.

Private real estate heavyweight KKR has been undeterred by an unpredictable market environment that has kept others on the sidelines. In fact, KKR views it as a good time to be investing because liquidity has become shallow and participants have retreated, according to Roger Morales, head of commercial real estate acquisitions in the Americas for KKR.

Industry players looking to offload assets are being discreet with the sales process, meaning more opportunities are coming off-market. “Intermediaries and sellers don’t go out as broadly as they would in more normal markets,” Morales explains. “They’re very targeted and selective around who they want to approach for a sale, they want to do it quietly and they are looking for a surety of close with strong sponsors. This is to our benefit, because of our reputation in the marketplace.”

These deals are being pitched almost in real time, and as such KKR couldn’t disclose specific deals as they are still working to close them. Both existing and new relationships are bringing deals to the table, Morales said.

KKR Roger Morales
Morales: KKR is being shortlisted by sellers for under-the-radar deals

In terms of the types of transactions it is targeting, the firm still plans to execute on single property deals in this environment, having built its real estate business largely through aggregation. “We’re still very focused on aggregating high-quality products that investors pay us for because it’s hard to build well-diversified, high-quality portfolios,” he says.

However, the scale of KKR’s real estate platform – which has around $170 billion of assets the firm is invested in or lending against, according to Morales – combined with the current scarcity of liquidity could open doors for larger transactions to further the firm’s growth.

“To the extent that the opportunities present themselves in shallow capital markets environments, we might be able to buy portfolios at very good prices, and use our operating capability to generate significant value that complements the value that’s created on the buy,” Morales notes.

Morales sees three silver linings in the broader macroeconomic environment, despite its current volatility: “One, real estate supply is coming down. Projects are having a hard time getting capitalized. Two, replacement cost continues to go up, given inflation. That is to the benefit of existing asset owners,” he says. “Three, occupancies across a lot of sectors are at all-time highs. This could be one of the most important offsets to the uncertainty that we’re currently living through.”