All asset managers are adapting to this macro environment in their own ways. In terms of private real estate, funds are taking more time to make investment decisions, exploring new sources of financing, and structuring creative methods to deploy capital. Jenn Elliot covered the cautious behavior among private real estate funds for WealthManagement.
It’s a sharp turn from the last couple of years when funds were much more aggressive in terms of investing and raising capital. Now, raising capital has become much more difficult given that the risk-free rate of return is above 5%. Additionally, rising recession risk, stumbles in the banking system, and stress in commercial real estate have also muddied the picture.
One silver lining is that many investors have been sidelined which means there is less competition for deals. Thus, private real estate funds have more time to evaluate ideas and can be more selective.
However, the most significant headwind is that a deflationary mindset has become pervasive. Essentially, most investors expect that prices will decline over the next year. In some ways, this becomes a self-fulfilling prophecy. So far, damage has been contained to commercial real estate where there have been a few high-profile defaults and redemption requests.
Finsum: Private real estate funds are behaving much more cautiously due to higher rates and increasing economic uncertainty.