Back in February, PERE spoke with capital advisory firm Hodes Weill about its latest M&A Market Review, which labeled 2022 as the second-busiest year for mergers and acquisitions since 2018. Then, the expectation from founder Doug Weill was for this momentum to continue into 2023, “possibly even accelerate as the year progresses – especially if LP allocations to funds and investment vehicles grow.”

Fast forward six months and such expectations of a return to robust transaction activity in M&A and in real estate generally – and Weill was not alone in his prediction here – have yet to materialize. According to Hodes Weill’s 2023 Mid-Year M&A Market Review, seen early by PERE, only 10 mergers and acquisitions in private real estate globally were closed or announced during H1, compared with 21 transactions in H1 2022.

Max LaVictoire, head of GP advisory services at the New York-based advisory business, told PERE this week although activity was muted at the start of 2023, the earlier optimism was informed in part by conversations with both managers and investors. Despite some pick up in transactions, he blamed the US banking crisis for throwing “cold water” on that momentum.

In this environment, competing for capital is also harder than ever. Instead of allocations increasing as expected, investors have kept a tight hold on the purse strings owing to imbalances in portfolio allocations caused by the relentless rise of interest rates. However, as demonstrated by Blackstone’s record-breaking $30.4 billion close earlier this year – which accounted for 42 percent of the total capital raised in H1 as per PERE’s latest fundraising report – raising capital is certainly easier for the biggest few.

Pulling the short straw in this conservative fundraising environment are the smaller, boutique real estate investment firms. For many of these, consolidation with bigger peers could be the only option to find strategic value or even, in certain cases, to survive. LaVictoire told PERE as much.

That said, the low real estate deal numbers for H1 suggest if pricing for assets is still a problem, the same should be the case for managers. Smaller managers open to sales typically need specific operational capabilities or geographical advantages to attract buyers. A lack of M&A activity suggests few groups offering such USPs are currently out there.

The fundraising environment is also stifling acquisitions by large traditional and alternatives managers seeking exposure to real estate for the first time. None of the 10 H1 deals in the report involved buyers with no previous real estate investment capabilities. Institutional commitments to the asset class may have greatly increased over the years, but real estate funds are still relatively small compared with their private equity or private credit cousins. In this significantly slower fundraising market, that factor makes real estate less attractive to such managers.

As LaVictoire pointed out, both fundraising and M&A share the same limiting factor in capital market instability. But where more consolidation and acquisitions may have been expected in an environment where the majority of real estate managers need to amplify their capital raising capabilities, the dominance of the largest firms has acted as both cause and effect in keeping M&A deals at bay. Those that can break out of this vicious cycle will be the best of the rest.