To get a sense of why commercial real estate deals have been picking up this year, take a look at EQT Exeter, the real estate arm of Swedish investment giant EQT AB and one of the world's largest industrial property owners. It's been leaning into acquisitions as the impact of higher borrowing costs led the Federal Reserve to cut its benchmark interest rate last month.
Henry Steinberg, a longtime company veteran and former president of EQT Exeter North America who was promoted last month as global head of EQT Exeter, said the firm is “rapidly accelerating” its capital deployment.
"We have this unique opportunity right now where there's some level of distress in the market. ... You have owners of real estate that need to sell," he said in an interview. “We think it's a compelling time to invest in real estate after a couple-year period of rapidly increasing and higher interest rates.”
The strategic shift is significant because EQT AB is ranked, in terms of money raised, as the third-largest private equity firm worldwide by Private Equity International magazine this year, just after Blackstone and KKR. EQT AB has the equivalent of about $265 billion in assets under management, a company spokesperson said, adding Radnor, Pennsylvania-based EQT Exeter's assets under management totals about $31 billion.
In a sign of EQT Exeter opening its wallet again, a $5 billion U.S. industrial flagship fund that "largely sat out all of 2023" has quadrupled spending from the first quarter through the third quarter, Steinberg said in the interview this week at EQT AB’s first U.S. capital markets event in New York.
As to EQT Exeter’s investment focus, Steinberg said industrial property, which makes up about 95% of its portfolio, remains a big growth opportunity despite some recent signs of a market slowdown.
“We've seen the bid-ask spread between buyers and sellers close, and it didn't close because our bids went up. Our math is the same, but now we're winning a lot more deals."
That's because owners facing maturing loans and still elevated interest rates were more willing to sell at lower prices than they would have wanted, he added.
"We're investing some of our flagship funds now at what we think are compelling risk-adjusted returns, at a significant discount to peak pricing," he said. "Sellers' pricing expectations came down, and where they were willing to transact is actually where the math makes sense based off of the higher cost of capital."
Time to buy
EQT Exeter's position reflects a shift in commercial real estate sentiment. U.S. commercial real estate investment sales in the second quarter rose quarter-over-quarter and annually, the first such increase since the second quarter of 2022, according to the brokerage Colliers' second-quarter capital markets report released in September.
"Major investors are back in the market, bidding on properties and acquiring portfolios," the report said. "Statements from investors support the idea that now is an ideal moment to acquire commercial real estate. At the same time, private investment has kept the market moving. Near-record reserves are waiting to be deployed, with investors looking across the capital stack on both the debt and equity sides."
Among the major property types, the return of institutional investors seems most "prevalent" for industrial properties, according to Colliers.
The CEO of the world's largest commercial property owner, Blackstone's Stephen Schwarzman, recently said the Fed’s “easing the cost of the capital" will be "a catalyst for transaction activity.”
Prologis, the biggest global warehouse owner and developer, this month said it's "scouring the market for opportunities” as it sees a "very attractive market for acquisitions."
Still, there's some caution among investors. Even though the Fed cut its benchmark rate by a half percentage point, leading to real estate “valuations to bounce off the bottom a little bit,” there's a sign the market is still in distress, Steinberg said.
He pointed out the 10-year Treasury yield, which he described as “the barometer that everyone in real estate uses to measure returns against,” has remained over 4%. That rate, after dropping to about 3.6% in September, has moved up to about 4.2%. Higher Treasury yields signal higher borrowing costs with commercial real estate asset values remaining pressured, industry professionals have said.
“Long-term rates have held consistently higher,” he said. “We believe that higher-for-longer trends is going to last. There's still going to be those pressures on owners of real estate to sell when their debt matures. … We think it’s a buying opportunity.”
For example, the newly unveiled EQT Exeter Real Estate Income Trust this month said it bought a last-mile delivery center leased by Amazon in the Seattle region’s biggest industrial property sale ranked by price in nearly two years. The brokerage JLL later said EQT Exeter picked up a four-building industrial portfolio near Columbus, Ohio, where CoStar data shows Amazon is a tenant. In August, EQT Exeter REIT announced two other industrial acquisitions totaling over $245 million.
Rising vacancy
Industrial properties, despite a promising long-term outlook, have suffered a recent setback, according to analysts.
The U.S. market has seen nine consecutive quarters of rising vacancy "because of new developments delivering vacant," said Adrian Ponsen, director of U.S. industrial market analytics at CoStar Group, the publisher of CoStar News. The industrial vacancy rate has risen to at least a 10-year high of 6.79%, sending the market asking rent to rise at its slowest pace in at least 10 years, CoStar data shows.
“Once interest rates started to rise in 2022 the spigot for speculative construction completely stopped," Steinberg said. "This is true in both Europe and the United States. … We’ve come a little bit off the line in terms of demand, because companies took down so much space during the pandemic. They have capacity in their supply chains. [But] we don't think the long-term trend of e-commerce is changing. We think that the next generation is going to order more online than the current generation, and that's going to continue to drive demand in the long run."
The long-term industrial outlook in Europe may be even more favorable as the adoption of e-commerce there is behind the United States, according to Steinberg.
“It's an older society, meaning that from a land development perspective, it's been much harder to acquire property and build speculatively in Europe than in the United States," he said. "Other than a handful of pockets, Europe is generally structurally undersupplied. The industrial stock is extremely old and, in many cases, functionally obsolete. … You have a really unique opportunity in Europe where we think demand is going to increase rapidly, and supply is, by nature, constrained, and the existing stock is not a modern stock.”
Steinberg said he also sees big growth to come in data centers needed to handle rising demand for artificial intelligence and cloud computing.
EQT Exeter is looking beyond industrial properties too. Like its larger rival Blackstone, the firm is also betting on multifamily investments globally as Steinberg sees the property type as “undersupplied.”
As to the office sector, Steinberg said while EQT Exeter has “historically” done “very well in office,” he said “office, particularly in the United States, is a very challenged space.”
“At the moment, I don't see the return justifying the risk,” he said. “The pandemic accelerated functional obsolescence in office space. … If you don't have the best building with the best amenities in the market, it's hard to predict if you can ever lease your office building again.”