Wall Street Is Ready to Scoop Up Commercial Real Estate on the Cheap

Wall Street firms are raising new funds to acquire office buildings, apartments and other troubled commercial real estate, looking to scoop up properties at a fraction of the price investors paid a few years ago.

Cohen & Steers, Goldman Sachs, EQT Exeter and BGO, formerly known as BentallGreenOak, are among the prominent names raising billions of dollars for funds to target distressed assets and other real estate with slumping values, according to regulatory filings.

“The last few weeks, I’ve been saying, ‘holy mackerel, they’re coming out of the woodwork,’” said Kevin Gannon, chief executive of Robert A. Stanger & Co., an investment-banking firm that tracks real-estate fundraising.

The new funds are seeking to capitalise on one of the most troubled commercial-property markets in decades. Values have nosedived since interest rates spiked last year, driving up borrowing costs in the highly leveraged business. The office market, one of the largest sectors, has also been clobbered by a sluggish return-to-office rate, which has sent vacancy rates soaring. Apartment buildings, an investor haven in the past, look vulnerable as owners try to refinance at much higher rates. Mall owners are contending with steep value declines, some of more than 70% over the past few years.

Commercial-property sales have been moribund until recently because most sellers haven’t been willing to cut their prices to the levels that buyers are demanding. Now, a small but growing number of office owners have begun to capitulate, unloading distressed properties.

The capitulation marks a new phase in the commercial real-estate upheaval, as more beleaguered property owners turn over properties to lenders or decide to take what they can get, rather than hold out hope for an eventual recovery. This wave of fundraising is the latest sign that sales activity is expected to increase as more sellers yield on price.

In one recent example, the owner of a downtown San Francisco office tower unloaded the property for $41 million to developer Presidio Bay. The seller, Clarion Partners, had purchased the property for $107 million in 2014.

While the clearest distress is in the office sector, many property owners with floating-rate debt may also feel pressured to sell at marked-down prices because they are unable to refinance at today’s higher rates. In addition, fund managers expect values to fall as regional banks, under pressure from this year’s rash of bank failures, unload commercial-property loan portfolios at discounted prices.

“There are selective opportunities beginning to arise for investors that are in a position to take advantage of weakness,” said Rich Hill, head of real-estate strategy for Cohen & Steers, which is aiming to raise more than $2.5 billion in a new nontraded real-estate investment trust.

Commercial-property values already have fallen about 10 to 15 percentage points from their peaks in the third quarter last year, and might fall a total of 20 to 25 percentage points, said Hill. “You have to go back to the [savings and loan] crisis and the global financial crisis to see such big declines in property valuations,” he said.

The volume of distressed commercial real estate grew by $8 billion in the second quarter, reflecting the rise in cases where the owners defaulted or lenders foreclosed, according to data provider MSCI Real Assets. That is the biggest quarterly increase since the second quarter of 2020.

While most of the new funds are looking to buy property, some are planning to lend to property owners and fill the void left by the cutback in activity from regional banks and mortgage real-estate investment trusts. With less competition, the lenders who are still active are able to charge higher rates and get better deal terms from borrowers.

Invesco Real Estate, which has a long track record of raising funds from institutional investors for real-estate credit funds, is raising its first such fund targeting the retail audience.

Many of the new funds, such as those being raised by Invesco and Cohen & Steers, are targeting individual investors. Smaller investors have shown an enormous appetite for property investments in recent years, especially with the growth of the nontraded real-estate investment trust industry which raised about $100 billion in the past seven years.

But many of the non traded REITs that were formed before last year’s rise in interest rates have been under pressure to redeem money back to investors who want to cash out. Over $9 billion was redeemed in the first six months of this year, according to Stanger, and many investors have been forced to wait to get their money because of the rush to the redemption door.

Still, the new funds will be facing a lot of competition from cash-rich funds aimed at institutions. Opportunistic real-estate funds run by private-equity firms have nearly $145 billion in so-called dry powder for future investments, up from $120 billion at the end of last year, according to data firm Preqin.

It is still possible that distressed opportunities won’t arise if the U.S. economy has a soft landing, in which inflation is tamed by the Federal Reserve without tipping the economy into recession.

Sales volume will likely increase when debt markets stabilise and values become more clear. “Broadly speaking, people are waiting to see what the world looks like,” said Michael Stark, co-head of the PJT Park Hill Real Estate Group, a global advisory firm and placement agent. “They’re waiting for motivated sellers.”

For years, tech entrepreneur Asher Waldfogel and his wife, Helyn MacLean, dreamed of building a modern house in Palo Alto, Calif.

The couple, however, worried about clashing with the Mediterranean-style architecture typically associated with their neighborhood of Old Palo Alto.

So they tapped architect Steven Ehrlich to create a design that paid homage to its surroundings with stucco, mahogany and titanium zinc cladding. They spent $20 million over several years building the house, completed in 2005.

Designed for indoor-outdoor living, the house has matching mahogany paneling and limestone both inside and out. Arthur Sharif/Sotheby’s International Realty

The dining room is between an outdoor garden and the staircase. Arthur Sharif/Sotheby’s International Realty

Now looking to be closer to their adult daughter on the East Coast, they are putting the five-bedroom home on the market for $44 million—the most expensive listing in Palo Alto.

Waldfogel is an angel investor who co-founded Redback Networks, a telecommunications-equipment company. MacLean previously had a career in fundraising.

The kitchen and family room open to the garden and pool. Arthur Sharif/Sotheby’s International Realty

Cast alcoves and mahogany shelves house the couple’s books and ceramics. Arthur Sharif/Sotheby’s International Realty

The couple purchased the roughly 0.4-acre site for $7.1 million in 2000 and demolished a circa-1930s Spanish Colonial home. The house they built pinwheels around a central staircase. It has 7,900 square feet of livable space, with four distinct courtyards and a pool.

A key feature of the home is a cast-in-place concrete wall, or spine, that is two stories high and about 80 feet long. “There’s a little bit of controlled chaos in what comes out of the form,” unlike a perfectly uniform surface, Waldfogel said. “If you want that, you do it in plastic.”

Ehrlich said it took a few tries to get the concrete wall right. Arthur Sharif/Sotheby’s International Realty

‘It’s a really hard material to tame,’ Ehrlich said of concrete. Workers learned as they went, and Waldfogel and Helyn grew to appreciate the imperfect material. Arthur Sharif/Sotheby’s International Realty

A central staircase is housed in a glass tower. Arthur Sharif/Sotheby’s International Realty

Waldfogel said he and his wife are thinking about the next phase of life now that their daughter is grown, although they have not decided where they will move. They also have a home in Sun Valley, Idaho.

“Right now we’re just trying to emotionally let go and decide what to do next,” he said.

Arthur Sharif/Sotheby’s International Realty

Two wings of the house are connected by horizontal planes. Arthur Sharif/Sotheby’s International Realty

Palo Alto, an epicenter of venture capital and tech startups in Silicon Valley, is home to some of the country’s biggest tech titans. Sales volume and prices are rising, with a median sale price of $3.5 million for the three months ending in August, up 5.8% year-over-year, according to real-estate brokerage Redfin.

Arthur Sharif of Sotheby’s International Realty—San Francisco Brokerage has the listing.

Wall Street Is Ready to Scoop Up Commercial Real Estate on the Cheap

Firms are raising billions of dollars for funds to target assets with slumping values

A five-bedroom Palo Alto home designed by Steven Ehrlich is listed for $44 million, making it the city’s most expensive listing. Built around a dramatic concrete spine, the home features four courtyards and a pool.