Private equity investors now control a large portion of commercial real estate today. What was once a niche area in the market is now seeing a surge in growth. Investors are targeting distressed projects and opportunities, hoping to come in, purchase a property from a troubled owner, and improve areas that have fallen off, such as maintenance or marketing. This strategy of investment often assists the former owner, lender and the tenant, by allowing the parties to work together, rather than cause a lengthy legal battle. However, private equity firms are also using this strategy because they continue to seek returns higher than those available in other commercial real estate investment opportunities.
In addition to investing cash into distressed properties, private equity investors are purchasing notes directly from lenders. In many instances, purchasing a note from the lender is the investor’s only access to a certain property. Many distressed assets are not for sale through a traditional broker. Rather, investors traditionally have to negotiate through several parties acting behind the scene . This type of negotiation requires a high level of expertise, which may not be available at every investment firm. In many cases, purchasing the note from a lender has progressed to deed transfers, once investors have a chance to work with the owners of the properties.
Despite the new role private equity investors play in the real estate market, skeptics remain. Some observers believe that the investors are creating a perilous situation by bidding up asset values in few primary markets. London, New York, Paris, and San Francisco are pointed to as markets where private equity investors have driven down cap rates to dangerous lows. In light of economic uncertainty, private equity investors may be forced to invest in a smaller, secondary market, or take riskier positions in deals in the top tier markets.