A theory for why CRE closed-end fundraising has fallen off a cliff:
Cap rates and stabilized yields in real estate just aren't attractive compared to other asset classes.
In many cases, quasi-government lending entities (Fannie and Freddie) in the multifamily space are getting… pic.twitter.com/Hv29TlLx2j
— Shashankh Aryal (@aryal1994) December 17, 2024
TLDR:
- Real estate cap rates and stabilized yields are less attractive than other asset classes.
- Multifamily lending from Fannie and Freddie offers better risk-adjusted returns than equity deals.
- Investment-grade corporate bonds (AAA, BBB) yield similar or higher returns with lower risk.
- Common equity investors are getting worse deals than lenders, who are securing better returns.
- Cap rates need to rise to 7%+ to make common equity in real estate appealing again.
- Sellers resist exits at 7% cap rates, preferring to sell at lower caps.
- Market may stabilize around 6.5-7 cap if rates stay the same.
- Opportunistic returns lie in creative, structured financing, not common equity yet.
Real estate’s current equity market is facing a major disconnect. With cap rates offering returns similar to lower-risk, investment-grade bonds, why would investors continue chasing lower returns in equity? For common equity to be appealing again, we need to see a shift to 7%+ cap rates. However, sellers are reluctant to sell at those levels, creating a standoff. Until that happens, the smart play is in structured financing, as common equity isn’t offering the returns needed to attract investors right now.