Why real estate M&A activity hit an all-time high in 2021

Hodes Weill, the New York-based advisory firm, saw a rebound in transactions because of a return to normalcy and a desire for retail capital.

Real estate merger and acquisition activity hit an all-time high in 2021, according to a new report produced by Hodes Weill, the New York-headquartered advisory firm. The firm tracked 33 mergers or acquisitions in 2021, an 83 percent year-over-year increase from 18 in 2020. The tally also beat the previous record of 26 in 2018.

The types of transactions reflected a desire for greater control on the part of buyers, with 100 percent sales making up almost half of all deals. Majority sales accounted around 18 percent of deals. The reasons for the return of majority or full-stake acquisitions – compared to 2020 when 55 percent of transactions were minority sales – are two-fold, David Hodes, founder and co-managing partner, told PERE in an exclusive interview.

One reason is that integrating teams was more challenging earlier in the pandemic. The merging of cultures required with 100 percent or majority transactions is more difficult to do successfully when people are working remotely. A more widespread return to the office in the second half of 2021 made managers more comfortable with team integration once again. The second reason is that the pandemic also made it harder to perform in-person due diligence, meaning less complex minority transactions were favored, Hodes said. Limited price visibility from a lack in transactions during the pandemic also made companies less inclined to take on bigger stakes.

Several factors contributed to the uptick in transactions. One was the desire for retail capital, as evidenced by multiple acquisitions of distribution platforms, particularly those focused on accessing pools of family office and high-net-worth capital. Key examples of this include Ares Management Corporation’s purchase of Black Creek Group, Blue Owl Capital’s takeover of Oak Street Real Estate Capital and Apollo’s acquisition of Griffin Capital. The view is that such platforms can be used to raise capital for a broad array of products, Hodes said.

“It’s difficult to build private wealth distribution platforms,” he noted. “If you can find one and cut a deal, there’s an immediate value opportunity.”

Also driving M&A activity were concerns about capital gains tax increases. Joe Biden’s 2020 election as US president stoked fears that the capital gains tax could be increased from 20 percent to 25 percent. Hodes said the anticipated tax changes helped to spur some sales, with some sellers believing that executing deals in 2021 was safer than facing an uncertain tax environment.

Other key themes include increased cross-border activity and competition driving up pricing in sought-after sectors of the market. Around 64 percent of the transactions Hodes Weill tracked were larger managers expanding into new geographies. One such example was Augsburg, Germany-based PATRIZIA’s €67 million acquisition of Canberra, Australia-based Whitehelm Capital, an infrastructure specialist with a significant Asia-Pacific presence.

Firms were also keen to access different sectors of the market via M&A, with QuadReal Property Group acquiring listed real estate specialist Ranger Property Group to fill out its public markets mandate, and Affiliated Managers Group, a West Palm Beach, Florida-headquartered multi-asset manager, taking a majority interest in Abacus Capital Group, a New York-based multifamily specialist, to access the asset class in the US at scale.

These themes dovetail with the overarching trend of manager consolidation. Hodes noted that around half of all capital raised in private real estate goes to the top five to seven managers. Managers that can cater to multiple risk profiles, sectors or geographies are more sought after by investors, which has led to bolt-on acquisitions of platforms in new areas of business.

“There are literally several thousand managers,” Hodes said. “For an investor, they’re going to have to decide at some point, ‘how many relationships do we want to have?’”