Real estate deals insights: Year-end 2018
Executive summary
As we closed out 2018 we were confronted with increased equity market volatility, rising interest rates and geopolitical uncertainty that caused some to revisit whether we were in store for a more substantive correction from a real estate perspective. However, as we analyzed the final numbers for 2018 and spoke with a diverse group of our clients and other market participants we are of the view that 2019 will see deal activity that is comparable to 2018 levels or higher. This, from our perspective, will be driven by a decoupling of deal activity from economic activity, market participants continued search for scale, the convergence of real estate with other sectors (particularly technology), and a simplification of business models to focus on those areas where firms have a competitive advantage or core competency.
”We believe that 2019 will bring deal activity that is comparable to 2018 levels or higher as deals decouple from economic activity, market participants stretch to scale, our sector converges with other sectors and business models are simplified. Today, is arguably one of the most exciting times to be a real estate professional.”
Key trends and highlights
- M&A trends in 2018 were driven primarily by entity level transactions, particularly in the US REIT space, where total deal value from transactions announced through November 2018 reached a record high of $76.3 billion. The retail sector led the pack with highest year-over-year growth in deal value, spurred by the abundance of capital, increased shareholder activism, and the existence of opportunities to transform traditional retail assets into experiential centers that draw customers and tenants alike.
- Private capital raising declined in 2018, with closed-end real estate funds raising an aggregate of $117.6 billion; dry powder ended the year at a peak level of $295.2 billion. This year’s fund closes highlighted the ongoing consolidation of investment management relationships among real estate investors, with average fund size increasing over 20% as investors flocked to a smaller number of asset managers in order to manage costs in the face of rising asset prices putting pressure on yields.
- Public capital raising by US REITs also declined in 2018, dropping by 50% from its 2017 high to the lowest level since the financial downturn of 2009. The disparity between deal volume and public capital raising highlights the ongoing divergence of asset valuations in the public and private markets, as well as the impact of a rising interest rate environment on public perception of real estate equity values.
