ow burn: This downturn is different
How the "lock in" effect is haunting commercial real estate investors.
---- Critical takeaways ----
-- Higher for longer -> too much debt
-- Suppressed trading volumes
-- Lock in effect (fund investors)
-- Continued capital calls
-- Assets need more time and more money
-- Funds struggle to raise new cash
---- Subsurface conditions ----
The Stepstone report leverages its unique database of LPs and funds, shedding light on underlying tensions...
1. Non-core fund values are down 11% from the peak vs. 23% declines in overall property values. Core funds get a lot of attention, but they are closer to market.
2. The "lock in" effect doesn't just affect homeowners. Fund distributions are nearly 70% lower than average, effectively locking in investors' capital.
3. Non-core funds have most of the industry's dry powder, but dry powder is down by 25%, largely driven by capital calls from floating-rate loans, fewer sales, longer holds, and more losses.
4. Stubborn fundraising. Total fundraising is down 30%+, which further exacerbates 'stuck in the mud' conditions.
---- So how is this downturn different? ----
Different "good":
No obvious explosion
Different "bad":
'Stuck in the mud' is boring but suffocates activity
---- Outlook ----
Investors' ability to avoid being locked in will likely drive outperformance. Sidelined investors could be increasingly forced to sell, creating further opportunities for their competition.
Bottom line: Index hugging will likely be a challenging strategy going forward, leading to exaggerated differences between winners and losers.
Read the full report here.
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