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Investors Bank Billions, Setting Up CRE Secondary Spending Spree

Major investors are gearing up for a year they expect to be flush with advantageous deals on real estate’s secondary markets, raising funds with billions of dollars at the ready for buying up partial interests in portfolios or recapitalizing troubled properties, among other options.

Ares Management, Blackstone and Goldman Sachs have all launched funds aimed at investing in secondaries, a segment of the CRE market expected to gain prominence in 2024. Secondaries are generally considered investments in existing assets that can bring in fresh capital, change up ownership structure or extend financing timelines.


“We share the strong enthusiasm of our investors and believe that the current real estate market dislocation and volatility provides a highly attractive environment for scaled and experienced secondary managers,” Michelle Creed, partner and co-head of Ares Real Estate Secondaries, told Bisnow in an email.

The flight to secondaries is one more strategy big investors are employing to extend their credit, diversify their income streams or otherwise keep placing capital in the toughest market in years. Although the secondary market is much larger in the private equity world, it started gaining traction in real estate after the Global Financial Crisis and has grown in recent years. 

Ares this month announced the completion of $3.3B in fundraising for its Landmark Real Estate Fund, which will buy stakes in other private real estate investment funds. Not long before, Blackstone closed on its own $2.6B secondaries fund, and Goldman Sachs' Vintage Real Estate III, a follow-up to its $2.75B fund closed in 2020, is still open.

“[Landmark Real Estate Fund] seeks to acquire seasoned assets at attractive discounts ... to capitalize on the attractive supply-demand imbalance and increasing appreciation for secondary markets,” Creed wrote.

But while this year has seen a spate of companies fundraising, it has been a slower one for the investments themselves, following a record year in 2022.

With the onset of interest rate shocks last year, investor interest in real estate secondaries spiked to $12.4B, according to Ares data. That total eclipsed what had also been a record $10.6B in 2021.

Ares will release data for 2023 early next year but said deal volume contracted considerably.

Setter Capital, which also tracks the secondaries market, found that the total volume of real estate secondaries deals in the first half of 2023 came in at $960M, down 48.4% from first-half 2022 figures.

The secondaries market is difficult to track, however. Many deals are private and never become known to the rest of the business world, making the data often spotty.

Still, the reality on the ground showed slower deal volume this year, the result of rising interest rates that made even more palatable secondary deals hard to stomach. Falling property values coupled with uneven expectations among owners caused a stubborn bid-ask gap.

“The first part of [2023] was slower, with public markets and other things,” Setter Vice President Gareth Morris said. “We saw what sellers were looking for versus what buyers wanted had widened a bit, and that inhibited some trades from happening.”

But as the ripple effects of the interest rate run-up of the last two years work their way through the market, that gap is expected to narrow, bringing buyers and sellers closer together and making more deals possible. 

“The buyer universe is just widening,” Morris said. “So you have dedicated secondary funds or fund of funds that have some ability to do secondaries out of their products, where they deploy 20% to 30%. So you have a lot of that kind of new buyers and, obviously, nontraditional groups that do look at secondaries opportunistically. Maybe some of these pensions or insurance companies.”

Secondaries can come in general partner or limited partner deals, and the two segments aren’t growing in the same ways.


General partner-led secondaries involve a larger investor that usually acts as an asset manager, and they enable the investor to retain high-quality assets that still have the potential to increase in value with more time and capital, Park Madison Partners partner Brian Di Salvo told Bisnow by email.

This segment of the secondaries market is poised to grow substantially due to debt maturities, fund life expirations, capital shortfalls, delayed business plans and investor liquidity pressure.

Limited partnerships are usually more passive investors, providing an injection of capital but staying out of day-to-day operations and management. These types of deals have been much less common.

“There's a complete dearth of activity in the limited partnership secondary market because there haven't been meaningful write-downs in the underlying funds,” StepStone Group partner Jeff Giller said. “For LPs to sell their positions, they would get a significant discount off of their [net asset values], and that's a tough pill to swallow.”

By contrast, general partners of investment structures are particularly open to selling in the secondaries market.

“GP-led secondaries are driven by the manager’s desire for a capital infusion,” Di Salvo said. 

“Selling investors typically have the option to exit, hold or invest more capital at their discretion,” Di Salvo said, though there can be different motivations between limited partners, who may be looking to get out of the game, and general partners, who may be looking to stay in.

The general partner market represents a different set of dynamics, Giller said.

“GPs need capital to solve issues in their portfolio,” he said. “Real estate is a complete capital pig, and with conventional lenders pulling back, LPs themselves are liquidity-constrained and don't have the capital to pump back in, so GPs are looking for other sources of capital and then accessing that through secondary markets.”

Distress in the marketplace is another driver of this type of investment, and it likely isn’t going away in the next few quarters. Commercial real estate-backed loan distress hit a 10-year high earlier this year, led by office properties that have seen demand fall and remain low.

Selling a secondary can help ward off distress, Brookfield Managing Partner Christopher Reilly said. Brookfield began a major foray into real estate secondaries a few years ago. The company also has several distressed assets around the country, including in Los Angeles and Washington, D.C.

“At the most extreme, a loan is maturing and the lender is going to foreclose and take the assets back and sell them at a very cheap basis to somebody,” Reilly said.

“But prior to that happening, if you're the existing GP and you believe in the value of those assets, you're going to try to recapitalize them before you completely lose them. And so we find a lot of interesting entry points and a lot of interesting assets that we can recapitalize at a good basis before they become distressed.”