Mergers and acquisitions of real estate companies fell to a three-year low in 2023, but as debt costs have pulled in and equity markets have risen, conditions may be ripe for a bounce-back.
Just eight deals totaling $37.76 billion closed last year, the lowest volume since 2020. By deal count, it’s the fifth-slowest year since Real Estate Alert began tracking M&A activity in 1996. Aside from 2020 — when the pandemic froze the market — it’s the first year with fewer than 11 deals since 2011.
Market pros blamed the stalled market on rising interest rates and falling property valuations, but with debt prices improving over the last two months, the sentiment among bankers has shifted to cautious optimism.
“We see an increased activity level in boardrooms and willingness to think through strategic options,” said Jens Thomas Jung, a managing director in the real estate and lodging M&A group at Citigroup. “Is this translating into transactions over the next couple of weeks or months? While that is always hard to tell, we’ve come through a long period in the markets with a disconnect between buyers and sellers on valuations and we see that disconnect vanishing. So, it’s hard to see another year with subdued deal activity as the overall factors that are facilitating transactions are starting to outweigh the negatives, favoring a rebound.”
Citi easily won the M&A league table by working on four deals totaling $28.74 billion, taking a 76.1% market share. The race for second through fourth was tight, with less than $2 billion separating advisors. Eastdil Secured took second, working on three deals valued at $17.48 billion, good for a 46.3% market share. Wells Fargo placed third (four deals, $16.42 billion, 43.5% market share), just ahead of Goldman Sachs (two deals, $15.20 billion, 40.3%). Evercore rounded out the top five, working on one $13.80 billion transaction that gave it a 36.6% market share.
In the three-year ranking, JPMorgan retained its title as the top advisor, working on 16 deals totaling $133.69 billion, or 62.8% of all M&A activity. Citi (14 deals, $118.77 billion) remained in second place with a market share of 55.8%. Goldman moved up a notch to third place (12 deals, $102.38 billion, 48.1% market share), pushing Morgan Stanley down one spot (13 deals, $95.11 billion, 44.7%). Fifth-place Wells (10 deals, $71.91 billion, 33.8%) was the only other advisor to break $70 billion from 2021 to 2023.
The largest deal last year was GIC and Oak Street Real Estate Capital’s $13.80 billion purchase of net-lease REIT Store Capital, followed by Extra Space Storage’s $11.34 billion acquisition of fellow self-storage REIT Life Storage. The remaining six deals had much lower price tags, ranging from $3.5 billion to $868 million.
Much like in the property-sales market, the cost of debt last year made most deals difficult to pencil out. Cedrik Lachance, director of research at Green Street, the parent of Real Estate Alert, said that if buyers temper their return expectations for a higher-interest-rate world, dealflow can resume.
“The real estate world is priced appropriately, and you’re starting to get close to levered returns that work for the classic private equity owner,” he said. “They’re not great, but they’re starting to get close. … What you need from the private side is accepting that the new world is a lower-return world for them, on a levered basis.”
Lachance noted that while some market pros last year were confident in a second-half rebound that ultimately never materialized, this year’s positive sentiment is more rooted in the fact that falling property valuations over the last year have set asset level pricing at or near the bottom for most property sectors.
“The optimism is ripe to be there,” Lachance added. “I’ll be quite surprised if we have a lower deal volume in ’24 than in ’23. There is a leveling of pricing, pricing is consistent with what’s available in terms of debt cost, and there is more of an acceptance of the pricing environment.”
Valuation fluctuations vary from sector to sector. Buildings in niche sectors such as data centers, self-storage and medical office remain popular with investors, while there are more concerns about rent growth in the multifamily and industrial sectors. Office REITs continue to have the most clouded future amid the stubborn work-from-home trend and a burgeoning wave of distressed sales.
To spur more deals, Kristin Gannon, a managing director at Eastdil, said the market needs to see conviction from some of the largest buyers. When players at the scale of Blackstone, Starwood Capital and Brookfield reenter the fray, others likely will follow.
“I think they all want to open the market back up,” she added. “They want to see activity and a great way to do that is to buy a company.”
Gannon said she expects dealflow to pick up in earnest once the Federal Reserve follows through on the first of its three telegraphed interest-rate reductions this year. Market speculation pegs that cut to take place, at the earliest, in March.
“There is greater probability that we will see more take private activity later in the year after the rate cuts,” she added. “And not just because of the cut itself, but people are also still dealing with their asset-management issues.”
Another factor that could lead to more deal activity is the sheer volume of capital that firms are waiting to put toward taking advantage of potential distress. Gannon said “the weight of that capital” could result in large-scale deals, particularly if debt pricing continues to recede from last year’s peaks.
“There’s so much dry powder out there and so much capital sitting on the sidelines,” Citi’s Jung added. “This is a unique point in time.”
Steve Hentschel, senior managing director and head of the M&A and corporate advisory group at JLL, said rising stock markets also are lifting REITs’ share prices, which better positions some of them to be acquirers in stock-for-stock deals, or to issue stock to be used in cash transactions.
“While REIT stocks underperformed the broader market last year, they’re still up and closing the gap,” he added. “If we can just see a couple of weeks of interest-rate stability, you’re going to see more things be announced. It won’t all happen three weeks from now, but the pace of the transaction grind is picking up.”
Real Estate Alert tallies acquisitions of entities that primarily own income-producing commercial properties in the U.S. It excludes single-property and portfolio transactions; sales of advisory, management or brokerage firms; roll-ups of investment vehicles; and other reorganizations involving affiliated entities in which ownership doesn’t change substantially.
Advisors are given full credit for transactions if they represent either the buyer or the seller. As a result, two or more advisors often receive full credit for a deal. Investment banks are given credit only when expressly named as “advisor” or “financial advisor” to a transaction. Advisors don’t receive credit if their duties are limited to providing fairness opinions.