Private property managers have plenty of cash to put into attractively priced deals, but they've largely remained on the sidelines since the end of the last market cycle.A lack of willing sellers and mismatched price expectations caused global deal volume to fall to the lowest in a decade last year, according to MSCI data.
Investor appetite in today's troubled market is characterized by expectations of major problems due to a sharp rise in interest rates heading into 2023 and their impact on real estate lending. Yet despite trillions of dollars of unpaid commercial real estate debt in the system, there has been little evidence of any troubled assets being bought or sold since interest rates peaked.
But the latest data from research firm U.S. Distress Tracker offers an early indication that this may be changing. The report found that distressed sales as a share of U.S. commercial real estate transaction volume rose to 3.9% in the first quarter of 2024, the highest level since the fourth quarter of 2015.
Moreover, the apartment sector accounted for roughly $1 billion of the $3.2 billion in distressed sales during the quarter, while retail also accounted for roughly one-third of distressed sales during the quarter, MSCI noted. The relative momentum of the latter two sales segments is notable given that the office sector accounts for the majority of distressed property in the U.S. market, at roughly $38 billion at the end of the quarter, compared with roughly $10 billion for apartments and $22 billion for retail.
This surge is not limited to the US market. According to MSCI's Capital Trends Europe report for Q1 2014, released this week, the share of commercial real estate sales that resolved distressed properties in the region rose to 3.2% of total transaction volume in the quarter, the highest level in the past decade. The retail sector accounted for almost half of the total volume of distressed property sales. Notably, the volume of distressed industrial assets traded in the region in the first quarter alone exceeded the volume of 2022 and 2023 combined.
This momentum will help thaw the overall deal market, with capital ready and waiting to seize opportunities from both the crisis and the subsequent market reset.
A great example of such capital came to fruition this week, when PERE announced that San Francisco-based commercial real estate credit specialist ACORE Capital had acquired ACORE Credit Partners II for $1.4 billion. The U.S.-focused bond fund is nearly three times the size of its predecessor, which raised $556 million in 2019, and occupies fourth place on the list of the largest private real estate funds acquired so far in 2024, according to PERE data.
The success of this fundraising encapsulates the attractiveness of the risk-adjusted returns available from real estate credit investments today, as banks retreat from the asset class.
Warren de Haan, ACORE's chief executive officer, said that due to today's downturn in the deal market, refinancing maturing loans and acquiring performing loans from distressed sellers will account for a larger percentage of ACP II's deal flow compared to its predecessor, ACP II. However, financing new acquisitions will remain the focus of the fund's investments. He expects new lending opportunities to arise, particularly in the multifamily sector, as a large number of loans on two-year-old multifamily assets expire in the coming months.
Across the industry, well-capitalized borrowers will be able to avoid the hangover of a steep interest rate hike without having to hand over the keys, but whether they're office owners or other less-viable real estate types, the calculations are starting to get tough. And as they get tougher, they'll suffer and ultimately revitalize the private real estate investment market.