No one wants to pay top dollar for real estate. A volatile stock market that has left investors looking for safe haven, with many allocating dollars to real estate fund managers. However, real estate funds have not yet deployed that capital, in part due to escalating property values. As a result, real-estate focused private equity funds are sitting on record amounts of dry powder. That amount reached $345.2 billion in the United States through August 2019, the highest level since research firm Preqin first began to track the data in 2000.
Decreasing bond yields, including the inversion of the closely watched yield curve, indicate that record-long U.S. economic growth may be coming to an end. The influx of capital into the real estate market is causing greater competition, as funds bid property values higher. Cap rates across the four major property sectors—industrial, multi-family, retail and office—have continued to decline and flatten out.
Real estate fund managers are having difficulty deploying capital at price points that can achieve desired returns, and continue to sit on the sidelines.
In the face of a potential recession, real estate fund managers are in a position to really show their worth. If they choose to buy assets now, it is vital to stress test the assumptions in their models to make sure properties can still be successful in a downward economy. The other option is to wait for the roller coaster of real estate prices to start its descent back to more desirable yields.