• CRE Daily
  • Posts
  • Weekend Edition: Billions Flow into Secondary Markets as Investors Chase Higher Yields in 2024

Weekend Edition: Billions Flow into Secondary Markets as Investors Chase Higher Yields in 2024

Major investors are readying for a year rich in opportunities in real estate's secondary markets, having raised billions for investments in portfolio stakes and the recapitalization of challenged properties.

Together with

Good morning. Major investors are preparing for a lucrative year in real estate's secondary markets, with billions raised for acquiring portfolio interests and recapitalizing properties. Plus, hedge funds are betting against US mortgage REITs ahead of anticipated rate cuts.

Todayโ€™s issue is brought to you by Juniper Square.

๐Ÿ‘‹ First time reading? Sign up.

๐ŸŽ Want free merch? Share this.


Investors Amass Billions, Eyeing Lucrative Opportunities in CRE Secondary Markets

In 2024, investors are turning their attention to the secondary markets of commercial real estate, anticipating a year filled with profitable deals and promising opportunities.

Shifting tides: Funds like Ares Management, Blackstone, and Goldman Sachs are raising billions to invest in these markets, which include buying partial interests in portfolios and recapitalizing troubled properties. Ares Management's Michelle Creed highlights the current market dislocation as an opportunity for experienced secondary managers. This shift towards secondary investments is a strategy to diversify income and extend credit in a challenging market.

Slowdown in fundraising: Although 2023 witnessed a flurry of fundraising for secondary market investments, with Ares, Blackstone, and Goldman Sachs raising billions, actual deal volume has decreased from 2022's peak. This slowdown is attributed to higher interest rates, which have cooled investor interest and widened the gap between buyers' and sellers' expectations. However, as the market adapts to these rate changes, it's expected that this gap will close, possibly revitalizing transaction activity.

Breaking it down: The secondaries market is divided into general partner (GP) and limited partner (LP) deals, with GP-led secondaries expected to grow substantially. These involve larger investors acting as asset managers, focusing on high-quality assets that can increase in value with more time and capital. In contrast, LP deals are less common due to the reluctance of LPs to sell at significant discounts. GP-led secondaries are driven by the need for capital to address portfolio issues and avoid distress, offering a unique entry point into the market, especially in commercial real estate-backed loan distress scenarios.


Big picture: The turn towards secondary markets in CRE is a strategic response to distress in the marketplace, particularly in commercial real estate-backed loans. For general partners, selling in the secondary market offers a way to infuse capital and avoid asset foreclosure. This strategy becomes especially relevant in the face of looming distress, such as the high levels of distress observed in office properties. Hence, secondary markets are not just investment avenues but also crucial tools for asset preservation and capital restructuring in challenging economic times.


Data governance across the investment lifecycle

While many GPs have a form of data governance for individual applications, business units, or functions, many still struggle with data gaps, internal incoherency driven by disparate systems, and a lack of lifecycle-wide governance.

Juniper Squareโ€™s latest guide examines how integrated technology supports data governance across the investment lifecycle, from fundraising to investor management to fund administration, allowing GPs to unlock the full potential of their investment partnerships. Download the guide here now.


Short Sellers Target US Mortgage REITs as Rate Cuts Loom

Hedge funds are betting against US mortgage REITs ahead of anticipated rate cuts. Despite the potential for lower rates, short sellers believe mortgage REITs will face challenges in 2024 due to maturing loans and declining property values.

Under attack: Hedge funds, including Muddy Waters and Viceroy Research, are heavily short-selling mortgage REITs, particularly those in commercial and multifamily lending, like Blackstone Mortgage Trust and Arbor Realty Trust. These funds have targeted major trusts despite losing about one-third of their value following Federal Reserve rate hikes. The ongoing short-selling suggests an expectation of further market downturns. The REITs, mostly lending to commercial and multifamily residential sectors, are struggling with depreciating property values and potential refinancing challenges.

Investment thesis: Mortgage REITs are at risk in 2024, with borrowers facing refinancing challenges due to falling property values and potentially needing to inject equity. The significant drop in office and apartment values raises the risk of defaults and financial instability. The end of protective interest rate hedges and weakening debt service coverage ratios in entities like Arbor Realty and Blackstone Mortgage point to looming repayment problems and financial strain.


Late to the party: Although hedge funds' short positions in mortgage REITs appear strategic, they carry inherent risks. Expected interest rate cuts may reduce pressure on these trusts, potentially countering the short sellers' predictions. Additionally, the impact of expiring hedges might be less severe than expected, and property values could increase after renovations. Considering the lingering risks in the market, short sellers are making a late but relatively safe bet on continued pain for mortgage REITs. But only time will tell.


The self storage sector, despite its resilience, experienced a downturn in investor activity due to economic uncertainties. In the first ten months of 2023, the total transaction volume in the U.S. was over $2.2 billion, a significant decrease from the $8.4 billion recorded in the same period of 2022. This year, around 24.7 million rentable square feet of storage space was sold, resulting in an average price of $144 per square foot, lower than the 2022 average of $182.4.

Data from Yardi Matrix reveals the top 10 self storage markets by sales volume up to October, which collectively represented 40.4% of the national transaction volume in this sector.

What did you think of today's newsletter?

Login or Subscribe to participate in polls.


or to participate.