There’s an emerging dichotomy among large real estate funds that are seeking to raise cash for new investment. On one hand, Blackstone Group LP has raised in excess of $10 billion in less than 12 months. On the other, funds such as Apollo have had difficulty in achieving planned fund sizes.
Apollo, with $75 billion in total managed assets, has raised roughly $385 million for its real estate fund over the past year or so, well short of the goal of $650 million.
Other funds (e.g., Morgan Stanley) have reduced the size of their plans. Still others have been forced to reduce fees, offer incentives, and agree to “opt out” provisions.
So what to conclude from this? My perceptions are as follows:
• Many large investors are still smarting from recent real estate losses. Some are choosing to invest with funds sponsored by perceived winners.
• Investors recognize that success in the non-realty sphere doesn’t necessarily foretell success in the real estate space.
• Pension funds are especially cautious and are being attracted to lower risk investments.
• The largest funds have a considerable advantage in the pursuit of large-scale portfolios.
• At least some large investors have concerns about prevailing overall risk and volatility in the economy and question the timing of major allocations to longer term investments such as real estate.
• Given current relative pricing and rather muted prospects for significant gains in lease rates, some investors are having trouble seeing how targeted yields will be achieved.
It’s far too early to predict which funds will perform on accordance with expectations and which won’t. However, it will be interesting to watch.
Steve Crosson is chairman and CEO of Crosson Dannis Inc., which provides real estate appraisal and consultation services. He also serves as chairman and editor in chief of The Appraiser Journal.
