Flood of Big Money Chasing Multi-Property Deals Resulting in Single-Asset Sales Set Aside in Favor of Bundled Package Offerings
A decade after the largest commercial real estate transaction on record, a torrent of global capital chasing a limited number of large real estate portfolios is fueling a shift in sales tactics following years of investment volumes skewed toward sales of single-property assets.
The limited number of available portfolios is helping push demand for the pooled assets that are on the market. In the final quarter of 2016 and into this year, at least four portfolio transactions of more than $1 billion have closed. Most recently, Swedish pension fund Alecta divested its direct real estate holdings, selling a mixed-asset portfolio of 47 office, retail, multifamily and industrial properties across the US and United Kingdom.
DRA Advisors’ $1.04 billion purchase last week of 184 mid- and small-sized warehouse, distribution and light-industrial properties from Cabot Properties included many properties capable of serving as “last mile” conduits in the race to achieve same-day delivery by e-commerce firms.
Capital market brokers and analysts queried by CoStar News suggest more portfolio transaction activity in the pipeline that will result in sales through the remainder of 2017 and into next year.
Single-asset sales have risen broadly in recent years while portfolio sales have lagged. As a result of pent-up demand on both the buy and sell side, it is anticipated that a larger percentage of sales going forward will be these portfolio- and entity-level transactions.”
Portfolio Deals Driving Sales Volume
Large portfolio sales, particularly in the office sector, remain well below the feverish levels of 2006 and 2007, even after subtracting the volume of Blackstone Group LP’s record-shattering $39.2 billion buyout of Equity Office Properties Trust, a 506-property portfolio totaling 90.3 million square feet finalized on Feb. 22, 2007. That deal marked the peak of the previous market cycle.
Combined with Blackstone’s disposition of smaller portfolios from the EOP purchase, and the $22.2 billion purchase of Archstone-Smith by a partnership of Tishman Speyer and Lehman Bros., 2007 set a record for CRE sales volume that stood until 2015.
Demand for property portfolios from domestic and offshore investors are expected to be a key driver of increased portfolio sales and total sales volume this year. CoStar Portfolio Strategy noted that large deals have been driving increases in office transaction volume, with 53% of volume in deals of $100 million or more.
Peter Hauspurg, chief executive officer of Eastern Consolidated, a real estate services firm with 80 sales, leasing and mortgage finance brokers, has seen a spike in portfolio sales in the New York and tri-state area for the past 18 months.
“I fully expect the number of portfolio deals to increase because there’s just no shortage of capital that’s chasing too few available assets,” Hauspurg said. “Despite reports that Chinese investors are pulling back, cap rates are still low despite rising interest rates, and we expect that to continue.”
In previous cycles, Hauspurg said he advised his brokers and owners to break up portfolios and sell them piecemeal to generate higher total returns. This time, however, high levels of capital pursuing a relatively small number of available large portfolio offerings is resulting in buyers paying a premium price.
For example, Eastern Consolidated brokered the sale of an 11-building portfolio of commercial and residential property in the Williamsburg section of Brooklyn, NY appraised at $65 million.
“It was a collection of cats and dogs properties, located in the same area but not contiguous,” Hauspurg said. “Once packaged together, though, there was such intense competition that it traded at $103 million.”
“And there are many similar examples of where we received a higher price selling properties as a package than we would have individually. Many of these large funds prefer not to spend less than $100 million on a deal,” he added.
Eastern Consolidated is currently marketing a 26-building package of three-story, walk-up apartment buildings scattered throughout New York’s Flatbush and Bedford/Stuyvesant submarkets. Once assembled as a portfolio, the package has drawn interest from several large bidders that otherwise wouldn’t be interested in the individual properties. “It surprised the heck out of me,” Hauspurg said.
Chris Roach, CEO of Dallas-based appraisal and valuation firm BBG, confirmed that his firm’s services are increasingly in demand by owners wanting to assess the value of their investments as portfolio offerings.
After focusing on selling properties as single assets earlier in the cycle, “We’re now starting to see opportunities again to bundle these properties,” Roach said. “It’s starting to change some transaction dynamics” as investors look to put their money to work in safe U.S. assets, he added.
“It’s a tricky market but we’re definitely seeing more portfolio opportunities,” Roach said. “From day-one this year, we’ve been working on several large portfolios. It’s happening right out of the gate this year, something we typically don’t see in the first quarter during a time when the market is slower.”
By Randyl Drummer