Some of the biggest investors in commercial real estate — private equity firms and property trusts not tied to the stock market — posted poor showings in 2023 when it came to fundraising.
New industry reports show that private equity firms raised their lowest amount of investment capital in 11 years, while nontraded real estate investment trusts hauled in their lowest amount in five years. What wasn’t different for the year is that funds in both sectors sponsored by Blackstone, led by its $114 billion in assets real estate Blackstone Real Estate Income Trust, received the largest share of the capital raised.
The fundraising results from Blackstone, Starwood Capital Group, LaSalle Investment Management, Ares, Apollo, EQT Exeter, Pacific Investment Management, and others come as the commercial real estate industry grapples with interest rate hikes, inflationary pressures, and geopolitical uncertainty.
And when fundraising declines, that historically has meant a drop-off in investments.
“Unless capital raise increases for Blackstone REIT and for the industry of nontraded REITs, there will not be a significant increase in acquisitions in 2024,” James Sprow, senior vice president of research at Blue Vault Partners, an adviser on alternative private securities offerings based in Atlanta, told CoStar News in an email.
A total of $138.83 billion was raised across 309 private equity funds in 2023, a significant drop from the fundraising peak of $236.04 billion across 554 funds in 2021, according to PERE, a publication that covers the private equity markets. The only year the private real estate market recorded a lower fundraising total was 2012, when $122.07 billion was garnered across 485 funds.
Fundraising for nontraded REITs was $10.2 billion in 2023 versus $33.2 billion in 2022. Last year’s tally would have been significantly worse without a one-time $4.5 billion boost from a University of California investment in Blackstone REIT in the first quarter.
Nontraded REIT securities are publicly offered to accredited investors but are bought and sold in private transactions, with their values set by the net value of holdings and the number of shares outstanding. As a REIT, they offer investors the potential of high returns as well as tax benefits.
The 2023 totals were the lowest since the $3.8 billion raised in 2018, according to Robert A. Stanger & Co., an investment banking firm based in Shrewsbury, New Jersey.
Market Decline
The totals reflect in part a decline in performance of commercial properties. Higher interest rates have made acquisitions and operations more expensive, while rent growth and occupancy rates have either declined or not changed significantly, industry analysts have said.
Over the past year, concerns about the state of the market led nontraded REIT stockholders to sell their shares, a move that has meant less capital dedicated to acquisitions. Eleven nontraded REITs have reported the year-end 2021, 2022 and 2023 net asset values of their commercial property investments, according to CoStar data. Those portfolios increased by $49.2 billion in 2022 but shrunk by $12.4 billion last year.
Private equity commercial property acquisitions dropped off sharply last year, as well. Private equity firms completed just $20.9 billion in acquisitions last year versus $87.3 billion the year before, CoStar data shows.
The large drop in nontraded REIT fundraising has forced the sector to preserve capital raised to pay for the high volume of share redemption requests, according to Sprow.
For example, Sprow noted, during the third quarter, Blackstone REIT did not raise enough new capital through common share issuances to cover the amount paid out in redemptions.
“The REIT has not recently raised capital on a net basis, but rather has had a net outflow due to redemptions and lower capital raise of over $4.7 billion over the second quarter and third quarter of 2023,” Sprow said.
Blackstone declined to comment specifically on fundraising to CoStar News. Blackstone REIT is the largest of the nontraded REITs.
Fundraising Leaders
Though fundraising edged lower overall in 2023, money was still accumulated in the tens of billions of dollars, and at least one record was set.
On the private equity side, Blackstone set a fundraising record by corralling $30.4 billion in April for one of its funds, Blackstone Real Estate Partners X, the 10th fund in the global opportunistic real estate fund series, according to PERE. The fund accounted for 21.8% of the private equity real estate capital raised in 2023.
In the nontraded REIT sector, Blackstone REIT led 2023 fundraising with $6.5 billion, inclusive of the $4.5 billion University of California investment, and accounted for 64% of the year’s total.
In addition, Blackstone REIT’s fundraising in the fourth quarter picked up substantially over the second and third quarters, according to the REIT’s federal filings. Fourth-quarter fundraising from stock sales of all classes came in at about $700 million, compared to about $400 million in the third quarter and $450 million in the second quarter.
The second-largest nontraded REIT, Starwood Real Estate Income Trust, reported similar trends of low fundraising and high investor share redemptions.
Starwood REIT has reported that it hasn’t been able to meet all its redemption requests over the past four months.
“January 2024 repurchase requests were approximately 42% lower than our peak in January 2023, which along with an improvement in sentiment and lower real estate values, provide optimism that repurchase requests are trending in the right direction,” the REIT said in a filing with the U.S. Securities and Exchange Commission. “Despite the decline in repurchase activity, we continue to prioritize liquidity preservation.”
The REIT added, “We are optimistic that 2024 will present better opportunities to play offense and deploy capital.”
