Private real estate has evolved, but not as much as you might think

For nearly a decade, the driving force for change in the industry has been M&A activity. But consolidation does not equal innovation.

This week, we introduced the PERE 200, doubling the size of our ranking of the largest private real estate fundraisers, and marking the first time we have unveiled a second ‘tier’ of firms in the industry.

Private real estate has come a long way since we launched our inaugural PERE 30 in 2008, when New York investment banks dominated the industry and the ranking. Since then, real estate fundraising has become substantially more diversified in terms of sector, geography and strategy. The ranking more than sextupling in size since its launch is also an indication that real estate managers are facing a playing field far more competitive than ever before.

But there has been less significant change in the industry than it seems. Yes, the global financial crisis triggered a reshuffling among private real estate’s largest firms, as we noted in a Friday Letter back in February. Of the top 10 in the debut 2008 list, only two firms – Blackstone and The Carlyle Group – remain in the top 10 today. Moreover, 14 firms, or nearly half of the first PERE 30, do not feature in the PERE 200 at all. Many of these firms ultimately were unable to recover from the legacy issues of their high-risk pre-GFC funds.

Yet this turnover happened within a short period of time. By the time the ranking expanded to become the PERE 50 five years after its launch Blackstone and Carlyle were already the only original top 10 firms remaining in that cohort.

Without another catastrophic event like the GFC to shake up the industry, the evolution of private real estate has been far less dramatic since then. Sure, the industry now has more firms based in non-gateway cities and raising capital for less traditional property sectors. But the industry stalwarts that command that majority of the real estate fundraising volume have been largely the same.

In the absence of a seismic macroeconomic event, the driving force for change among private real estate firms has been, and will continue to be, consolidation. The firms making up the top 10 in this year’s ranking are largely unchanged from that of the debut PERE 100 ranking in 2019. However, the three new names on the list – ESR, BentallGreenOak (which returned to the top 10 in 2020 after a one-year absence) and Ares Management – have all expanded with real estate-related mergers and acquisitions in the past year.

Although consolidation is a key component of industry evolution, so is innovation. And one can argue that many of the most dynamic firms in private real estate are the smaller, more nimble specialist managers that feature prominently on the second 100 list. For example, of the five managers with the biggest increases in their fundraising totals, four – Bellco Capital, Cresset Partners, Dermody Properties and Seavest Investment Group – specialized in a particular segment of the market.

If these sharpshooter firms have big growth ambitions, they will inevitably follow in the footsteps of many others that sought greater scale and market reach. They will become absorbed into the industry behemoths that will buy them to further diversify their product offerings. But, if this happens, it will make it more challenging for those firms to continue to innovate. Private real estate managers will certainly continue to evolve, but that evolution may not always be for the better.