01 Apr TOO MUCH CASH
One thing I heard early on in my Real Estate career is that Real Estate Capital Markets is a bit of a Catch-22. There are either a lot of good deals but little money to use or very few good deals but a lot of money to use. The latter half of this has been playing out recently.
Last week I read an article titled “Real-Estate Funds Have a Problem: Too Much Cash” in the Wall Street Journal. Real Estate Funds across the world are having trouble locating enough deals to satisfy the size of their increasingly large funds. Specifically cited was Jamestown’s US Focused Real Estate Fund which said it would invest all $570 Million by the end of 2018. Despite decreasing leverage from 60% to about 20% there is still money left to invest.
Many real estate funds had been achieving outsized returns during this long economic and real estate expansion. Due to the success, funds continued to raise bigger funds and promise the same returns they had been achieving. Brookfield Asset Management recently closed its largest-ever property fund at $15 billion and Blackstone Group LP is close to finishing a record $20 billion fund. But now, as the market is at its peak, cap rates have decreased to record lows and interest rates are beginning to rise, many of those promised returns are almost impossible to achieve.
From my perspective in suburban Maryland, I am finding this story to be very relatable. When the recovery from the recession was beginning to kick into full gear, there were many opportunities to buy distressed assets, invest heavily and capitalize on the growing economy to lease them quickly. Now, vacancy rates have decreased, leaving less vacancy for a value-add strategy. The opportunities that still exist are the ones with truly transformative ambitions or in specific sectors of growth. This could be ground up Trophy Office in an Urban environment or the development of Life Science in Montgomery County or Data Centers in Northern Virginia.
I am personally very grateful for the surplus equity in the market right now. It made our equity raise for 704 Quince Orchard relatively easy and hopefully, our next equity raise will also be relatively easy. However, this next building is already proving to be a more expensive purchase.