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Cash Stockpiles, Cheap Debt Spurring Commercial Real Estate M&A Frenzy

Commercial real estate firms are putting their pandemic-era stockpile of dry powder to work this summer in a flurry of mergers and acquisitions.


Real estate deal value topped $44.2B in the first half of 2021, a nearly 400% increase from the same period last year, according to law firm White & Case. Brokerages, REITs and private equity giants are taking advantage of low interest rates and using the moment to diversify their portfolios, especially in asset classes that have thrived amid the coronavirus pandemic.

“There's a ton of money out there, valuations are through the roof, the debt markets are wide open,” Lowenstein Sandler partner and Private Equity Chair Steven Siesser said. “There’s tremendous activity.”

Businesses listed on the S&P 500 were holding 6.3% of their assets in cash last month, well above the long-term average of 3.8%, according to a Nationwide Financial analysis. Firms are flush after holding onto capital and acting like “deer in the headlights” as recently as four months ago, Nationwide Chief of Investment Research Mark Hackett said. 

“They weren’t spending money on anything, but profits were coming in,” Hackett said. “They were stacking cash on their balance sheets.”

The Federal Reserve doesn’t plan to raise interest rates yet, Chairman Jerome Powell said last month, making large transactions more appealing. And as demand for industrial, multifamily and life sciences properties has soared, cap rates have compressed and real estate values have soared. Apartment prices rose 12% year-over-year in June, according to Real Capital Analytics, and industrial prices were up 9.8%. 

“REITs have seen their stock prices implode in the depth of the pandemic, to strongly rebound, with all these positive capital flows,” Piper Sandler Equity Research Managing Partner Alexander Goldfarb said. 

Retail prices have rebounded somewhat from the worst of the pandemic, rising 3.2% since last June. Several publicly traded retail owners have merged as investors seek to capitalize on the economies of scale.

“By creating scale, the company essentially becomes a more efficient business model,” Wide Moat Research CEO Brad Thomas said. “You’re seeing the growth advantages and the cost-of-capital advantages being the stars lining up for M&As.”

Retail giants have combined expansive portfolios of shopping centers, which have performed well throughout the pandemic. Real estate investment trusts Kimco Realty and Weingarten Realty joined forces in April to create a $20.5B company under the Kimco name. The merger combines 559 open-air, grocery-anchored shopping centers and other assets totaling approximately 100M SF of gross leasable area. 

Grocery-anchored retail thrived when restaurant traffic dwindled last year.

“A lot of these shopping centers are anchored by grocery stores, they’re doing well as people spend more time at home,” Green Street co-head of Strategic Research Dave Bragg said. 

Kite Realty Group and Retail Properties of America last month merged in a $7.5B deal, compiling 185 open-air shopping centers totaling 32M SF. Overseas, private equity firms are locked in a bidding war for U.K. supermarket chain Morrisons, with the latest bid from Fortress topping £10B ahead of a deadline next Friday.

Public companies in hard-hit hospitality and healthcare sectors are also scaling up as their businesses recover. REIT Ventas bought independent living community owner New Senior Investment Group in June for $2.3B amid a record-low occupancy rate, and Hyatt acquired Apple Leisure Group Monday from private equity owners for $2.7B.

“This will reposition us to be the high-end brand for leisure travelers, and it increases our leisure portfolio to more than 50% of our mix,” Hyatt CEO Mark Hoplamazian said in a statement. “It is so unusual to buy a platform with so much embedded growth and wind at their backs.”

Private equity giants are scooping up firms in emerging asset classes, banking that the portfolios are underpriced. Blackstone has been at the forefront of the activity, spending $6B on rent-to-own residential developer Home Partners of America; dropping $1.75B for UK developer St. Modwen; and paying $6.7B to take data center owner QTS Realty Trust private. Blackstone and private equity player Starwood Capital Group also took hotel chain Extended Stay America private in June in a $6B joint venture purchase.

Brookfield Asset Management spent big with a $5B purchase of modular workspace and home manufacturer Modulaire Group from U.K. private equity firm TDR Capital.

"Many of these deals are striking new highs in terms of valuations for the seller," Bragg said. "That's probably the primary motivation to sell a company at a valuation that is unprecedented due to the considerations that drive the buyers, the amount of equity capital that's available at favorable lending terms."

Starwood is using its deep pockets to push Sam Zell’s Equity Commonwealth REIT into a bidding war for industrial landlord Monmouth amid sky-high demand for industrial assets. A shareholder vote next week will determine if the industrial REIT will go private.

Beyond the equity market, commercial real estate brokerages are also using cheap debt to diversify their portfolios beyond traditional retail, multifamily and industrial sectors.

Savills acquired life sciences tenant representative T3 Advisors in June to shore up its bona fides in the booming sector. CBRE bought Las Vegas-based Union Gaming investment bank for an undisclosed price, acquiring a firm that has become a go-to for gaming giants. That purchase comes after it invested in proptech and coworking and formed a special-purpose acquisition company that will take a solar power firm public.

“I think the trauma of the last 12 months has made people re-evaluate their diversification,” Hackett said. “If you were heavily into malls or offices and you got beat up a year or so ago, you’re looking to diversify into some non-correlated assets.”