A Race For Distressed Assets: Deep Discounts Draw Cash-Flush Investors To Commercial Real Estate

By Jennifer Wentworth | Thursday, 15 February 2024 10:30 AM
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As reported by The Wall Street Journal, a surge of cash-rich investors are seizing the opportunity to acquire commercial real estate properties.

These properties are being offered at significant markdowns by developers grappling with debt repayment challenges.

Investment firms, having amassed substantial cash reserves during the COVID-19 pandemic, are keen on purchasing these discounted properties. Ares Management, for instance, is acquiring 3 million square feet of office space and has proposed to buy assets tied to $500 million in high-priority property debt. This comes at a time when the commercial real estate sector is wrestling with approximately $2.81 trillion in loans due to mature by 2028, amid dwindling demand and exorbitant debt costs driven by high-interest rates.

Rich Banjo, co-president of Artemis Real Estate Partners, told the WSJ, "We're in a period of time where it's great to have dry powder." Artemis recently closed a $2.2 billion fund last year, which has been actively purchasing discounted properties.

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According to the WSJ, private-equity firms managing global real estate funds had $544 billion in cash in Q2 2023, a significant increase from $457 billion in Q4 2022. Distressed commercial property escalated to $85.8 billion by the end of 2023, up from $56.9 billion at the end of 2022.

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Investors are particularly eyeing office building owners who have seen their profits dwindle due to the widespread shift to remote work instigated by the COVID-19 pandemic, resulting in reduced office space requirements. Hotel owners struggling to maintain their properties and apartment buildings lagging in construction schedules due to pandemic-induced supply chain disruptions and work stoppages have also been on investors' radar.

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Commercial property interest rates are experiencing upward pressure due to the Federal Reserve's hikes to the federal funds rate, now set between 5.25% and 5.50% - the highest in 22 years - in a bid to curb soaring inflation.

The downfall of leading developer China Evergrande Group, triggered by a judicial decision in January, has resulted in the liquidation of over $300 billion in liabilities. This could potentially depress global property prices as the company offloads assets. The escalating cost of borrowing has led to a $1 trillion depreciation in global office property values.

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