Nontraded REITs Have Raised Over $20B This Year And Are Shifting CRE Market Dynamics

Tens of billions of dollars are being raised this year by some of the biggest investment firms in real estate into nontraded REITs, a rapidly growing segment of funds that are shifting the dynamics of the industry's hottest property sectors.

The money pouring into these nontraded REIT funds, managed by investment giants such as Blackstone and Starwood, could be leveraged to create up to $100B in buying power just from the capital raised this year.

The funds are largely targeting multifamily and industrial assets, pushing up pricing in those already-competitive sectors, and the way the funds are structured could lead to a major shift in the markets.

Nontraded REITs are perpetual investment funds, meaning they don't have the same pressure to sell assets as traditional equity funds with finite lives. Some industry leaders think nontraded REITs will hold properties for longer time periods, creating a shortage of assets on the market for sale and reducing the frequency of trading in the sectors.  

"These nontraded REITs, when they buy these assets, they take them out of circulation for a while," said CBRE Vice Chairman Jack Fraker, who leads the firm's industrial capital markets division. 

The nontraded REIT segment set an all-time monthly fundraising record in August with $3.69B raised, according to investment and research firm Robert A. Stanger & Co. Total funding into the segment for the first eight months of this year reached $21.3B, surpassing the previous full-year record set in 2013, according to Stanger.

Nontraded REITs are now on pace to raise $35B for this full year, according to Stanger, which increased that projection last month from its previous estimate of $30B. Robert A. Stanger CEO Kevin Gannon said the firm raised its projection because of the strong fundraising hauls last month from some of the biggest names in real estate investment, and he said the $35B estimate might end up being low given the market's acceleration last quarter.  

Blackstone Group is the leading fundraiser in the nontraded REIT space, bringing in over $14.8B from January through August, according to Stanger. The firms with the next largest investment hauls this year are Starwood Capital with $3.6B, Ares Real Estate Group with $1.1B, FS Investments with $432M, Nuveen with $387M and Hines with $312M.  

Two major fund managers have launched new nontraded REITs this year. KKR launched a nontraded REIT in May with a $2B fundraising target, and Brookfield Asset Management in July launched a $900M nontraded REIT with a portfolio that combined some of its own assets with those from its 2019 Oaktree Capital Management acquisition. 

"This is one of the fastest-growing sources of capital focused on commercial real estate," Green Street co-Head of Strategic Research Dave Bragg said. "It’s driven by a couple big groups, and there are more entrants on the way."  

Why Nontraded REIT Funding Is Skyrocketing

Hines Global Income Trust Chief Operating Officer Janice Walker, who manages the nontraded REIT fund that has over $2B in real estate investments, said she sees multiple reasons why investment into the sector is picking up. She said the entrance of more institutional asset managers into the segment is bringing a higher level of capital-raising power, and she said the performance and structure of the funds are attractive to investors. 

Walker said the funds are particularly appealing to investors because they don't have the volatility of publicly traded REITs. Most nontraded REITs report their net asset values monthly, a more stable metric than a stock price that fluctuates daily. 

"One reason so many folks are coming into the space from an investment perspective is because of the ongoing search for yield and the success that these funds have had in distributing a consistent yield to investors while avoiding some of the significant volatility in the market," Walker said. 

Investors also like nontraded REIT funds because they provide up-to-date valuations of their assets using third-party appraisers every month, which is not available from public REITs, Gannon said. He also said these nontraded REITs have consistently provided strong returns for investors, and they proved reliable last year in their ability to meet requests from capital sources to cash out portions of their investments during the coronavirus pandemic. 

Gannon said he is seeing big chunks of capital flowing into nontraded REITs from institutions and endowments that may not be large enough to start their own real estate funds, but that see these investment vehicles as a good way to get into the sector. He said he is also seeing money coming in from wirehouse brokerage firms like Morgan Stanley, UBS, Merrill Lynch and Wells Fargo. 

"Before, the space was kind of shunned because it was always deemed the fees were too high. Now they’re not saying that," Gannon said. "We’re seeing institutional investors come into this space buying big slugs of nontraded REITs because of the diversity it provides, the professional management it provides, the liquidity they have if they need it. The monthly pricing, everybody likes that."

Fraker said he does see institutional investors buying into nontraded REITs, but he said a large chunk of money is coming from smaller private investors, as many of the funds have relatively low minimums. 

"In the United States, there's 80 million baby boomers and they are thinking about their retirement years, and there is a lot of volatility in the stock market, and you get very little returns with bonds or banks," Fraker said. "So mom-and-pop private investors like that they can get a 5% or 6% dividend, and that's why they're buying this asset class. They get a reliable, predictable dividend."

How Nontraded REITs Are Impacting Real Estate Markets

When their equity investment is leveraged with acquisition loans, these nontraded REITs could have nearly $100B in purchasing power from the money being raised this year. They are investing most heavily into the multifamily and industrial sectors, pushing up pricing in those already-competitive markets. 

"The amount of money these groups are pushing out is astronomical," said MK Asset Management principal Hugh Williams, a Chicago-based industrial broker. "Blackstone, Black Creek, Nuveen, all of those guys are really taking a strong interest in the industrial market."

Blackstone Real Estate Income Trust, a nontraded REIT, in August reached a $3.1B deal to buy WPT Industrial REIT, which has a 37.5M SF industrial portfolio. Ares Management's Black Creek Industrial REIT IV in July acquired an 8.3M SF industrial portfolio for $920M.

Hines Global Income Trust in May acquired a Louisville fulfillment center, its seventh industrial acquisition in a 12-month period. Walker said 50% of the nontraded REIT's $2B in real estate investments are in the industrial sector, and around 25% are in multifamily assets, but it is becoming harder to buy properties in those sectors.

"It's a very competitive marketplace," Walker said. "With more and more capital coming into the market, we will start to look to other niche sectors, as well as office and retail." 

Gannon said industrial and multifamily are the two hottest targets for investments across the nontraded REIT sector, and he said the billions of dollars flowing in from those funds are impacting the markets. 

"The nontraded REIT guys are moving the needle on pricing," Gannon said. "They’ve got to put the money to work. The market’s digesting the impact of these guys. I think they’re outpacing the traded REITs in terms of their acquisition capability."

Pricing in the multifamily and industrial sectors has increased by more than 15% over the past three months, according to a report Green Street released Wednesday.

Eastdil Secured President Mike Van Konynenburg, speaking on a Green Street webinar last month, said he thinks the $80B to $100B buying power of nontraded REITs is having an impact on the multifamily and industrial real estate markets, according to a report Green Street published after the webinar. 

Van Konyenburg said that because these nontraded REIT funds are perpetual investment vehicles, rather than funds within finite life cycles, they will hold onto assets for a longer time. He said this is leading to properties in those sectors becoming increasingly scarce in the transaction market.

Bragg, who moderated the webinar with Van Konyenburg, told Bisnow Monday the perpetual nature of the nontraded REIT funds is different from the typical investment vehicles that Blackstone and other asset managers deploy that have five-to-seven-year time horizons. Shorter timelines lead funds to bring properties onto the market for sale frequently, increasing the volume of trading in the market, but the nontraded REIT funds could hold onto the assets for longer. 

"I don't know how long they’ll hold them because we’re only a few years into this, but it seems as though the way Blackstone talks about it is as though these are assets and portfolios they plan to hold for a long period of time," Bragg said. "Maybe it's a decade or two, but certainly longer than the shorter hold periods we tend to associate with real estate private equity."

Gannon said nontraded REITs may hold for longer than traditional funds, but he said they will still bring properties up for sale when it makes sense. They could want to keep their portfolios fresh with newer assets, and they may need cash to pay back their investors, which have the ability to redeem 20% of their investment per year. 

"Will they be as frictional as funds that have short-term holds? No, but they'll still be culling their portfolios," Gannon said. "It's rare that an owner sits on a property and holds it forever. Particularly with these perpetual entities, they've got to deal with the capital requirements of their stockholder base." 

Fraker said he sees more equity chasing industrial deals than properties available for sale, but he said nontraded REITs aren't the only type of buyer creating that dynamic. He is also seeing demand from public REITs, private equity funds, pension funds and foreign investors. And while he said nontraded REITs may hold onto properties for longer, there will still be properties hitting the market from other owners and developers. 

"It does take a lot of properties off the market for near-term sales," Fraker said of the nontraded REIT activity. "But if properties go out of circulation because of the ownership profile that buys them, there’s always new product coming on the market for sale, too."

Williams said that while nontraded REITs acquire large, multi-property portfolios to achieve scale, they may decide portions of the portfolios don't fit their strategy and sell assets off individually. 

"We need to go through a generation of the nontraded REITs," Williams said. "The velocity very well may slow ... I'd be hesitant to say trading is going to fall off a cliff, but it might slow, and it will change."

Walker said Hines Global Income Trust typically underwrites acquisition for at least five-year holds, and sometimes 10 years, and she said nontraded REITs generally have longer hold periods than traditional private funds. She said there can be some scarcity in the industrial and multifamily acquisition markets, but there will always be new properties coming up for sale. 

"That can always be an issue, especially because there are certain markets where assets don't trade as frequently because people do tend to hold that real estate," she said. "But if you think about plain old supply and demand, if people are really seeking product, there will be a seller. Scarcity of product drives up prices, and that's what's happening currently."