The real state of real estate: deal volume, fundraising, and usage patterns 

The real estate sector has endured a volatile 24 months, with real estate operators and investors not only having to manage the impact of higher interest rates on the sector, but also the long-term changes to real estate usage sweeping across the industry following the pandemic.

In the face of these multiple headwinds, global private market deal activity fell 47 percent in 2023, with real estate fundraising falling by almost a third year-on-year.  

As the industry emerges from this period of dislocation, however, the outlook is improving. Interest rate stability will help to bring mainstream buyers and sellers back to market after a year of pausing for breath; while investors with the conviction to pursue deals in a still unpredictable market could be rewarded with bargain valuations. 

Interest rates remain elevated from recent levels, but amidst uncertainty, real estate opportunities are emerging for savvy real estate players. 

In this article, we’ll explore how three key facets will shape these opportunities in the months ahead and drive real estate fundraising and transaction activity. 

Deal volume rebound in the right sectors

Real estate dealmakers stayed cautious and deal volume remained low as we moved into 2024. However, interest rate stability (even in a scenario where anticipated rate cuts are delayed) can help to support a recovery in certain real estate deal markets under the right conditions, such as residential real estate and industrial real estate. As vendors and buyers align on valuations and form a clearer picture on how to price risk and build deal structures, we hope and expect to see the same effects roll out to the broader real estate space alongside these stabilizing interest rates.

While Q1 2024 still saw a 6 percent year-over-year decline in deal volume, as JLL reported, “the pace of declines continued to moderate across the Americas and EMEA, an early signal of growth.” We’ve seen a cluster of high-profile real estate deals progressing this year to support this outlook.

In one of the largest real estate transactions since the pandemic, Abu Dhabi investment fund Lunate and Saudi Arabian firm Olayan Financing Company acquired a 49 percent stake in ICD Brookfield Place, the iconic Dubai office tower. Deal value was undisclosed, but Bloomberg reports that the property has been valued at an estimated US$1.5 billion.

Other notable deals in 2024 include Blackstone selling the Arizona Biltmore Hotel to UK-based real estate manager Henderson Park in a deal reported to be worth US$705 million, and investment manager Ares and landlord RXR forming a joint venture to invest in New York office buildings.

Real estate dealmakers will be cautiously optimistic that an improvement in Q1 2024 real estate transaction activity will carry through into the rest of the year.

Fit for fundraising

As real estate markets reopen, managers will hopefully be in a better position to realize portfolio assets and increase distributions to investors. 

Increasing distributions will in turn put investors in a better position from a cashflow perspective, and more able to recycle distributions into the next vintage of real estate funds. 

Fundraising, however, is likely to continue tracking trends observed in 2023, where the market bifurcated in favor of large real estate platforms or managers running specialized and distinctive strategies. 

Through the headwinds that faced the market in 2023, investors moved to consolidate manager relationships and coalesced around large platforms, enabling large cap real estate managers to continue closing jumbo funds despite the large drop in overall fundraising. According to McKinsey, five managers accounting for well over a third (37 percent) of closed-end real estate fundraising in 2023. 

Large managers are set to continue dominating fundraising, but investors are also looking for exposure to specialist strategies, with analysis from PERE showing that a higher proportion of sector-specific funds are closing or exceeding target sizes than generalist funds. 

Shifting usage patterns

Looking at the challenges facing real estate from an operational perspective, the sector is still grappling with how to adjust to the shifting usage patterns that have reshaped real estate following COVID-19 lockdowns. 

Home working habits have become entrenched following the lockdowns, putting severe pressure on office space valuations, while the ongoing shift to online shopping has had severe impacts on retail space. 

Inflationary pressures, cost of living and supply chain disruption, meanwhile, have made for a choppy logistics market, where demand has slowed and higher vacancy rates have been reported, according to JLL. 

But while some real estate sub-sectors have suffered severe dislocation, others are thriving.  

The data center market is red hot, with CBRE forecasts showing demand rising to record highs in 2024 as vacancies fall to all-time lows, supporting robust rental rates. Strong demand from large cloud computing service providers serving the market with computing power and data storage at enterprise has shown no sign of slowing down and bodes full for sustained growth in the data center space. 

Other strong performing areas include purpose-built student accommodation, where investors have seen strong operating performance and demand after lockdown restrictions eased and campuses reopened, with demand for life sciences lab space also high, underpinned by advancements in diagnostics, personalized medicine and genetics. 

Shifting usage patterns, however, will also provide opportunities for contrarian investors who have the conviction to lean into sub-sectors deemed “unfashionable” and back assets at attractive valuations. 

Contrarian investment opportunities could include retail and shopping center assets that have survived the last decade and proven their resilience, or Chinese real estate, which has gone through a severe liquidity squeeze but may now be coming out the other side. 

Overall, market dislocation has increased real estate investment risk, but also opened opportunity. 

Take on real estate industry challenges with Alter Domus 

The real estate sector has encountered considerable challenges in the past few years but signs of promise continue to emerge. To make the most of the emerging opportunities and push through the trials, having a trusted partner on your side is essential. 

At Alter Domus, we have decades of experience in weathering the ups and downs of the real estate market and providing essential fund services through challenging times, from fund administration and property accounting, to AIFM services and depositary offerings, and more. 

Reach out to our real estate services team to learn more about how we can help.