It is too early to be talking about a fundraising recovery

A highly regarded industry report points to several reasons for optimism in 2024. But one key driver for fundraising is still missing for now.

The latest fundraising stats do not give the private real estate industry much reason to celebrate. A total of $92.8 billion was raised during the first three quarters of the year, according to PERE’s Q3 2023 fundraising report, which was published this week. It is the lowest Q1-Q3 amount raised since 2013, when $73 billion was gathered during the same timeframe.

If capital raising activity continues at its current pace, 2023 will be on track to be the worst fundraising year in more than a decade, with an estimated $124 billion raised by year-end. The last time fundraising totals sunk to such levels was in 2012, when just $119.7 billion was captured for the entire year.

Although a surge of equity raised during the fourth quarters in 2021 and 2022 helped boost the overall fundraising numbers for both of those years, the industry should not expect a repeat event during the final quarter of this year.

The fundraising outlook for 2024, however, looks rosier. Some reasons for optimism can be seen in New York-based capital advisory firm Hodes Weill’s 2023 Allocations Monitor, also published this week. The report, which surveyed 175 institutional investors from 25 countries, showed that more than 80 percent of institutions are now actively considering investments in closed-end funds in 2023, reversing a three-year decline and up from 74 percent in 2022. But while investors are currently underwriting commitments, it is for allocations they are looking to make in 2024, not 2023.

In an interview with PERE, founder and co-managing partner Doug Weill pointed to multiple reasons for increased investor interest in closed-end fund commitments. A major impediment to real estate fundraising over the past couple of years has been the denominator effect, with many institutions becoming overallocated to real estate because of public market declines. But the denominator issue has been waning, as public equities have rebounded and private real estate is in the midst of a correction.

Investor conviction is also on the rise. On a scale of one to 10, with one being the least favorable, survey respondents rated their view of the investment opportunity in real estate at an average of 6.4 points, marking the second-highest level of conviction reported since 2013.

Although it is widely expected fundraising will pick up in 2024, the subdued capital raising market is not likely to come roaring back to life in the first quarter or even first half of the year. As Weill noted, investors are still very cautious about deploying capital too quickly while the market is still correcting. Indeed, some industry observers expect at least a couple of additional quarters of write-downs. Write-downs can in turn help to spur another important driver of fundraising momentum – transaction volume.

But the outlook for a significant pickup in transaction activity does not look promising in the near term. According to data provider MSCI’s Q3 2023 US Big Picture report, deal volume has fallen at “high double-digit rates” for four consecutive quarters. This ongoing decline has continued despite the fact pricing write-downs have also been under way since Q4 2022.

Indeed, four quarters of pricing resets have not had a discernible impact on transaction activity thus far. It will require both additional write-downs and a notable uptick in investment volume to drive a meaningful rebound in fundraising activity. All of that is predicated on a wide consensus on a new normal basis for transacting – set by settling interest rates and costs of financing. Until that happens, it does not look like the muted capital raising environment of 2023 will be going away anytime soon.