Private Equity Funds Eye Opportunities in a Recovering Economy

Private equity giants like Blackstone (BX) are well-positioned to capitalize on a recovering economy.

Private Equity Funds Eye Opportunities in a Recovering Economy

Private equity giants like Blackstone (BX) are well-positioned to capitalize on a recovering economy.

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Good morning. 2024 is setting the stage for PE giants like Blackstone (BX) to capitalize on a recovering economy. Meanwhile, New York lawmakers are closing a “Frankensteining” loophole in the state’s housing laws that has left landlords are outraged.

Today’s issue is brought to you by First National Realty Partners (FNRP).

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Market Snapshot

S&P 500
GSPC
4,781.58
Pct Chg:
+0.14%
FTSE NAREIT
FNER
764.96
Pct Chg:
+0.38%
10Y Treasury
TNX
3.82%
Pct Chg:
+3.82%
SOFR
1-month
5.33%
Pct Chg:
0.0%

*Data as of 12/27/2023 market close.

INVESTMENT STRATEGIES

Private Equity and Their $300B Warchest Eye Opportunities in a Recovering Economy

2023 marked a pivotal year for private equity firms in real estate, as they amassed a staggering $300 billion in 'dry powder.'’ With 2024 arriving, PE giants like Blackstone (BX) are well-positioned to capitalize on a recovering economy.

The state of PE: Due to a 45% drop in property transactions compared to 2022, private equity firms are now sitting on a record amount of capital for real estate investments in the New Year. Blackstone, the king of dry powder with a $66 billion stash, epitomized this trend. Jon Gray, Blackstone's president, hinted at a potential spending spree in the company's third-quarter earnings call.

“Ultimately, there will be real estate to buy and real estate to sell, and with our $66 billion of dry powder, I think we're going to be in a really unique position,” Gray said. “I mean, we raised this $30 billion plus global fund. I think we've invested less than 5% of that fund today. We have the vast majority of our Asia fund uninvested, and our Europe fund we're just raising, so by definition is uninvested. So, we think we're well-positioned in this environment, particularly if banks pull back and there are liquidity shortfalls.”

More capital on the sidelines: Erin Patterson from Manulife Investment Management highlighted that, apart from the known 'dry powder' in private equity, there's substantial capital on the sidelines due to investors' reluctance to inject new funds into firms that are not buying assets right now. However, Patterson sees a favorable investment environment in 2024 led by a clearer picture of interest rates, easing recession worries, and robust fundamentals in the commercial real estate market, with the office sector being the exception.

“We're settling into this norm. It is a general shift in sentiment, where sellers will start to come to market and that is what leads to price discovery,” Patterson said. “Once you have price discovery, then the financing and lending environment can start to respond. Once we have assets that start to go to market, and we have a response from potential buyers, then that kind of proves out that investors still want their capital in real estate.”

Investment strategies: CoStar data reveals that the largest amount of dry powder is earmarked for opportunistic investments ($139 billion), followed by value-added ($84 billion) and debt funds ($40 billion). Despite this, value-added strategies could be more promising in 2024, as higher interest rates decrease new real estate supply, particularly in U.S. apartments, warehouses, and hotels. Additionally, about 40% of floating rate loans are due to expire in the first half of 2024, presenting value-add prospects.

➥ THE TAKEAWAY

Looking ahead: The real estate market in 2024 will require time for buyers and sellers to reach a pricing consensus, with transaction volumes expected to rise in the latter half of the year. Certain sectors like multifamily and industrial properties may see quicker deals due to narrower bid-ask spreads. However, the office market remains uncertain. The higher interest rates and stringent refinancing conditions may lead to more property turnovers, creating opportunities for private equity and opportunistic investors to capitalize on distressed assets and provide rescue capital.

A MESSAGE FROM FNRP

Retail real estate a bright spot amidst dark headlines for office and other property types

In recent months, financial publications such as the Wall Street Journal and GlobeSt have been buzzing with the same sentiment: Retail Strip Malls are the investment to make. But what's fueling this heightened interest? 

  • Limited New Construction: Over the past decade, there has been mounting scarcity in new retail construction. 

  • High Occupancy Rates: Occupancy rates are at a high that hasn't been reached in the last eight years. 

  • Resilience: Strip malls have shown resilience against both recessions and the rise of e-commerce. 

This moment represents a unique investing opportunity for individual investors looking to partner with an experienced, vertically-integrated owner/operator of necessity-based retail.

As one of the leading strip mall acquirers of 2023, First National Realty Partners (FNRP) is your ideal partner. With over $2 billion in portfolio assets, FNRP handles everything from financing and acquisition to leasing, asset management, accounting, and finally through sale of the asset at the end of the hold period.     

TRENDING

  • Housing crisis: Cities globally, including New York, are facing a severe housing affordability crisis, pushing away skilled workers and exacerbating political divides.

  • Amazon funds housing: Amazon provided a $16M loan for Housing Diversity Corporation's 271-unit affordable housing project in Seattle.

  • Can’t covert: Charles Cohen plans to surrender Midtown's Tower 57 after defaulting on the lease, owing $9 million in rent and $4.2 million in taxes, due to high vacancies and low office demand.

  • Wealth migration: Latin America's richest investors are moving their fortunes to Miami at an unprecedented rate, driven by regional instability and the allure of higher yields than available domestically.

  • Construction financing: Pebb Capital secured a $173M loan from Monroe Capital and JPMorgan Chase for the Sundy Village mixed-use project in Delray Beach, featuring retail and office space.

  • Compass compensation: Compass CEO Robert Reffkin is forgoing $25 million in stock awards for a $7 million cash bonus, as per an SEC filing. His 2024 base salary will increase to $900,000 from $400,000 in 2022.

  • More legal trouble: Elie Schwartz and Nightingale Properties face a lawsuit over withholding records for a Midtown East building, with foreclosure and receiver appointment looming for 20 East 46th Street.

  • Cooling down: Both multifamily and industrial sectors face challenges with decreased deal volumes and rising cap rates, despite being favored during the pandemic, as per MSCI's observations.

  • Conversion projects: To tackle its housing shortage, New York City is converting commercial spaces into 5,812 residential units across 63 projects, mainly in Manhattan but also in Brooklyn, Queens, and the Bronx.

  • The big unknown: As the Federal Reserve considers its 2024 interest rate policy, it faces the challenge of fostering economic recovery while managing decreasing inflationary pressures post-pandemic.

  • Logistics insights: CBRE's new report emphasizes that local market conditions, rather than high interest rates or tight lending, are key indicators of real estate logistics health.

HOUSING POLICY

Hochul Signs Rent Bill Addressing the "Frankensteining" Loophole in New York

New York legislators are closing a loophole in state housing laws that permitted landlords to merge vacant rent-stabilized apartments and significantly increase rents, a move that has sparked anger among property owners.

What happened: The new law expands the definition of fraud in rent overcharge cases, posing a significant challenge for landlords. It especially affects combined rent-regulated units, known as "Frankenstein" apartments, leading to concerns about more overcharge claims and proving compliance without historical renovation records. Landlords fear this could financially harm the rent-stabilized market and tenants due to potential reduced revenue for building maintenance.

All in favor: Tenant advocates and the bill’s sponsors argue that this legislation clarifies the 2019 Housing Stability Tenant Protection Act. It aims to close loopholes that landlords have historically exploited to deregulate housing. The law sets strict guidelines for calculating rents for combined units, ensuring that they remain rent-stabilized and do not exceed the total of the previous individual apartments' rents. This move is seen as a critical step in preserving affordable housing and addressing the homelessness crisis.

Landlord concerns: Alongside these changes, the bill restricts landlords' ability to raise rents through substantial building renovations. A key provision gives owners a six-month window from the bill’s enactment to apply retroactively for deregulated status achieved through rehabilitation. Landlords are concerned about their ability to document past renovations, especially in cases where buildings have changed hands, arguing that this could inadvertently re-stabilize previously deregulated units.

➥ THE TAKEAWAY

A balancing act: The drive to restrict Frankensteining is part of a broader effort to reinforce rent regulation in New York. This comes amidst debates on the maximum allowable rent increase for over one million stabilized apartments. While tenant advocates view this legislation as a critical step to protect affordable housing, landlords see it as overly punitive and detrimental to the real estate market. This legislative action underlines a growing emphasis on tenant rights in New York, balancing renters' needs with property owners' interests.

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