Deployment of Capital- Changing Times?

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Deployment of Capital- Changing Times?

By Jeff Tomei, Principal, Knightsbridge Realty Capital, Inc.

When my two partners and I formed our advisory company over 20 years ago the three of us had seen several cycles in commercial real investment, some good and some not so good.  We decided to focus on joint venture equity primarily from institutional investors since many of our clients were 1) looking at larger transactions and 2) didn’t have the capacity to raise “friends and family” equity as efficiently to meet those needs.  Up until the great recession in ’08-09 capital was plentiful and we had several options for our clients from pension funds, life insurance companies, family offices and other real estate investment funds.  

That business slowed for a few years following the financial meltdown, however it’s back with a vengeance.  What I mean by that is capital is flowing in from all over the world to invest in commercial real estate in the U.S in record amounts.  While the pandemic has caused the number of transactions to decrease the heavyweights have continued to raise capital over the past few years.  Blackstone, Goldman and Carlyle to name a few are sitting on billions of dollars to invest in commercial real estate.  With cap rates at record lows many of these institutions are having to adjust their business models in order to deploy the capital they have raised.

We know the money has been predominately focused on the coasts and a handful of markets that have the population base and demand drivers to support investment in commercial real estate.  We also know the capital continues to favor investment in the multi-family and industrial sectors.  Consequently, those sectors drive the lowest cap rates which in turn cause yields to be compressed.  Good for the seller, not always so good for the buyer.

We are now seeing the institutional investors expand their reach into other asset classes and smaller markets in order to more quickly deploy the capital that has been raised and to meet their return requirements.  Historically these large funds would focus on the 4 major asset classes (office, industrial, apartments and retail) in large markets described above.  Now many of these investors are expanding into mobile home parks/RV parks, self- storage, hotels (distressed and non-distressed) and land development.  

Some of the capital that has been sitting on the sidelines during the pandemic is having to seek yield in in development opportunities in secondary and tertiary markets that have been underserved by older product.  Does this mean this is a paradigm shift as we know it?  Probably not entirely but if the current cap rate environment continues to be compressed I think we’ll see capital move in other directions.  So if you are a broker or a user of capital don’t be shy about your project if it’s in a small market or not a primary asset class.  Get out and talk to the institutional guys.  What am I saying, brokers and users of capital are never shy.