Deloitte M&A Outlook Points to a CRE “Transition Year”

The previous year wasn’t too kind to the financial or commercial real estate sector due to bank failures, ever-tightening capital and a pullback in property sales. This, in turn, led to a halt in commercial real estate mergers and acquisitions. Fast-forwarding to now, Deloitte’s “2024 Commercial Real Estate M&A Outlook” said that we’re in a time of “cautious optimism.”

Here’s why:

Possible Transaction Increases

The Deloitte analysts explain that if interest rates moderate, real estate could become more attractive to investors, “boosting valuations and narrowing the bid-ask spread so that more transactions can take place.” Furthermore, assuming a pickup in M&A activity, look for asset types like industrial, data centers, student housing and open-air retail to take the lead.

Growth in Private Assets

Private equity firms currently have $2 trillion in liquidity and “increasing pressure to deploy their uncommitted capital,” Deloitte analysts noted. Thanks to their ability to raise funds, “private equity firms are likely well-positioned to take more assets private this year,” the report commented, using KSL Capital Partners’ 2023 acquisition of Hersha Hospitality Trust as an example.

Better Handling of Debt Maturities

Debt maturities aren’t going away – roughly $929 billion in commercial mortgages will come due in 2024. Nor will this necessarily mean a wave of delinquencies or foreclosures. The Deloitte analysts suggest that actions taken might include:

• Extending maturity dates

• Turning properties to lenders

• Finding alternative capital sources like mezzanine debt or increased equity

• Tapping into alternative lenders or investors from traditional financial institutions

Increase in Creative Private Equity

The Deloitte analysts noted that private equity firms could continue examining “deal targets or structures” that are not typically considered, like those involving infrastructure.

Proptechs Seeking Ownership

The report pointed out that proptechs’ venture capital dwindled in the face of IPOs. As a result, “similar proptechs looking to exit in 2024 may pivot to acquisition by private equity, a real estate investment trust or a larger proptech company,” the Deloitte analysts said, adding that this could be challenging for companies that aren’t generating cash from operations.

What’s Next?

The Deloitte 2024 real estate outlook is a mixed bag, calling this a “transition year.”

Analysts explained that retail will continue to bounce back nicely, but “higher borrowing costs and a cooler labor market may make it harder for multifamily property developers to refinance existing loans, especially in pockets with too much supply.”

There’s also little joy in the office sector. However, mezzanine equity could help with lenders potentially offering workarounds “as market participants wait to see what transpires in the near term,” the report said.

However, the bright spot is alternative sectors. The Deloitte analysts noted that CHIPS Act incentives will likely drive new construction in the industrial sector. Furthermore, “data centers and cell towers have become one of the most attractive risk-adjusted properties to real estate owners and investors” as have self-storage properties and senior care.”

After two years of declining fundamentals, the Deloitte report said that the capital markets might have reached their bottom. “How industry leaders choose to respond could determine the trajectory for 2024,” the report added.

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