EC Commercial Real Estate: The King Kong Of Category Killers

In the event you thought the prolific profiteers went gently back into the night, consider today’s Exhibits A & B. The size of private equity real estate funds raised continues to set records. Starwood’s promise of 14-16 percent net annual returns helped the $51 billion fund firm set a record target size for its current fund of $6 billion. According to Bloomberg, ‘opportunistic’ real estate strategies led the way in the second quarter, raking in $16.8 billion across nine funds compared to a scant $2.2 billion in lower-risk funds. Why go home when you can go big?

As for Exhibit B, REITs have swiped the baton from Commercial Mortgage Backed Securities (CMBS) – see unwise regulation reference above. REITs have been conspicuous in their presence in the debt markets of late – why not pile debt onto a lightly regulated platform?

In early August, Boston Properties, Hilton Escrow, Builders FirstSource, Kennedy-Wilson, MGM Growth Partners and Rexford Industrial Partners all tapped the debt markets. To not be outdone, private equity giant Blackstone filed to launch a $5 billion nontraded REIT.

“Not only have REITs begun to pick up the slack of the CMBS regulatory-induced slowdown,” noted Reynolds, “they are now beginning to do so in a leveraged fashion.” As public pensions desperately pour more and more money at these go-go vehicles, Reynolds predicts REITs will propel CRE lending to fresh heights in 2017 and for years to come. His conclusion; “That should make the CRE bubble, and the eventual bust, more intense.”

Well, at least that gives us something to look forward to. Throwing good money after bad always ends well, especially against a backdrop of the immense oversupply of retail space hitting the market in the coming years. Your gut would tell you that there’s no way many of the weakest properties manage to secure the refinancing required to keep the lights on. The billions upon billions of dollars being thrown at CRE, however, would seem to suggest otherwise. The question is, how many former movie theaters can be transformed to movie studios before the credits roll? Are there as many remakes in the cards for America’s malls as there were for the likes of Kong? If not Jeff Bezos, perhaps Chuck Prince could help out in answering that question.

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Robert Kientz 4 years ago Contributor's comment

Brilliant article. The only reasons to buy local (and not online) are a) niche or premium products not available online and b) convenience of I need it now. Walmart's neighborhood store concept should continue to thrive because Amazon cannot capture those who need milk for their kids for dinner tonight, not two days later. However with Amazon same-day delivery model being rolled out to a city near you, it won't stop them from trying. Eventually Amazon drones delivering goods direct to home will blot the skies of America.