The Real Estate Secondary Market Is Having A Moment

The market for buying and selling stakes in real estate funds — known as secondaries — is having a record year as institutional capital floods into the market. 

The secondary market has seen a jump in activity since the pandemic as commercial properties suffer from valuation cuts and the property sales market has been slow. This has left many investors in need of capital looking to cash out before the full partnership sells, and an increasing number of players are willing to buy their stakes.

Last year, the real estate secondary market saw 163 transactions representing roughly $14.6B of net asset value, according to Ares Management. The transaction volume from last year outpaced a previous record set in 2022, which saw 161 transactions and $12.4B of NAV.

"Secondary market volume and commercial real estate transactions is at a peak level," Madison International Realty Chief Investment Officer Carey Flaherty told Bisnow.

“There are moments in time where that product is more relevant to the marketplace than other points in time,” he said, “We're certainly in one of those moments right now."

Madison has been investing in real estate secondaries for two decades, and the market has become much more crowded over the last two years.

In June 2024, Goldman Sachs raised $3.4B for its real estate secondary fund, marking the largest fund of its kind ever. Ares closed a $3.3B fund in December 2023, and Blackstone's $2.6B fund closed in November 2023.

In February, New York-based Neuberger Berman closed its NB Real Estate Secondary Opportunities Fund II LP with over $1B raised, surpassing its $800M target. The fund is 48% larger than its prior one.

Flaherty credits the influx to three things: the lack of liquidity in the market, the new players who have entered the secondary market and the evolution of the market as a whole, which has created more opportunities for investment.

He looks at an ideal secondary transaction as a 'win-win-win' scenario: investors can access much-needed capital through the buyout, general partners can continue managing the asset without a hiccup, and it creates investment opportunities for companies like Madison.

Founded in 2002 by Ronald Dickerman, Madison International Realty has focused on providing liquidity solutions to owners and investors. The firm has worked in the secondaries business for over 20 years, targeting the United States and Western Europe.

Flaherty said the firm has seen the secondary market thrive during previous periods of severe illiquidity, like the Great Recession in 2009 and 2010.

"We've had a fascinating kind of front-row seat at Madison to observe the evolution of the real estate secondary market in private equity," Flaherty said. "I think whenever you find periods of illiquidity in the commercial real estate space, kind of secondary market liquidity solutions come to the forefront."

Flaherty said there are several ways a secondary deal can occur, but they have traditionally been limited partner-led fund deals, where an LP sells its stake in a private equity fund or portfolio of funds.

There are also general partner-led deals, which Flaherty said have gained momentum this cycle. It's a deal where the sponsor of a portfolio sells one or two assets to another fund. These deals tend to be larger in scale, with entire transactions being recapitalized across portfolios.

"They're designed to provide holistic liquidity solutions to existing investors in their transactions," Flaherty said. "That evolution has just given more participants in the secondary market an opportunity to deploy capital in different types of secondary transactions."

The market has also evolved in the ways these deals come about. Flaherty said larger brokerages have whole teams dedicated to facilitating these deals and helping investors make these connections.

Platforms have also been created for investors to find these deals faster. In June, LPshares, an online secondaries marketplace, facilitated an LP-led exit worth over $1.1M for 1.3M SF The Crescent office tower in Dallas. The exit took only two weeks, faster than it takes traditional deals to close.

“This is exactly why LPshares exists,” Paul Couture, a spokesperson for the company, said in a release. “The seller got immediate liquidity. The buyer gained access to a stabilized, income-generating trophy asset. And the sponsor brought in a qualified investor without lifting a finger.”

Flaherty said that the billions of dollars being raised from secondary funds looking to invest in the market does create implied competition for Madison, but he says he doesn't see much of an impact because these deals rely on strong relationships with investors. 

Flaherty said Madison has been targeting alternative assets, including data centers, cold storage, senior housing and student housing.

In 2024, the company acquired an 18% stake in a portfolio of multifamily assets in Western Europe, primarily in Germany.

It also bought stakes in individual assets. In March, Madison acquired a 50% stake in WS Development's 580K SF Legacy Place open-air shopping center in Dedham, Massachusetts, from Nuveen Real Estate. In 2019, it acquired partial ownership of WS Development's MarketStreet property in Lynnfield, Massachusetts.

While the secondary market tends to heat up during times of economic turbulence, Flaherty said he thinks the momentum it has gained in recent years can be sustained for the long term. 

"I do think that it's become more and more widely recognized that secondaries have a permanent place in the investable life cycle of real estate private equity," Flaherty said. "It absolutely serves a purpose.”

CORRECTION, AUG. 15, 11:45 A.M. ET: A previous version of this story incorrectly used Evercore data to represent the transaction volume in the real estate secondaries market. The story has been updated.