Dry Powder Pivots Amid Growing Consensus That Valuations Have Bottomed Out

The Federal Reserve is “resolute” in its commitment to sticking a soft landing, San Francisco Fed President Mary Daly said Tuesday. For the hundreds of billions of dollars waiting on the sidelines to make deeply discounted commercial real estate acquisitions, that’s a problem.

Early signals after the Fed’s first rate cut in four years indicate that the loosening monetary policy is starting to unlock capital markets, with more properties being listed and more investors looking to close deals. 

A consensus is growing that market valuations have bottomed out and, in response, some of the dry powder that was raised is pivoting towards more traditional deals. For the funds that continue to wait for steep discounts, doubts are growing that the deals will ever materialize in a meaningful way. 

“There is a lot of dry powder on the sidelines, and they were waiting and waiting and waiting,” said Ermengarde Jabir, a senior economist at Moody’s Analytics focused on commercial real estate. “Now, some of that dry powder is starting to be deployed because they're realizing that the deep distress is much less likely to happen.”

The Fed’s pivot — important not only because it cut the benchmark rate by 50 basis points but because it signaled a shift in monetary policy — is in some ways the starting gun for the disposition of a backlog of assets that were waiting for a better time to come to market. 

Matt Sharp, co-founder of Hamilton Point Investments, has put seven multifamily properties on the market in the last month and has seen an uptick in potential buyers touring the assets. 

Knowing large private equity funds are scouring the market for deals, in some cases pivoting from looking for outsized returns to those more typical in the sector, Sharp bundled five of the properties into a portfolio. 

“The dry powder that is much larger institutions in the form of callable capital, those guys aren't buying middle-market stuff. They're not out there buying $15M or $25M properties,” he said. 

Connecticut-based Hamilton Point Investments, which has acquired more than 32,000 apartments across the country typically for short-term hold periods, is also in the market but has recently been outbid on at least three deals, Sharp said.  

“There are multiple bids,” he said.

”If it's a $20M property, everyone comes in at $20M and it ends up selling for $22M.” 

Capitalization rates have already begun to compress in the multifamily and industrial sectors, according to an analysis by CBRE. The brokerage expects capitalization rates broadly will be declining by the end of 2025, even in the challenged office sector, but it predicts they’ll still stabilize in the medium term above pre-pandemic levels.

“Based on the increase in deal volume, I think that our clients must think that we hit the bottom,” said Diana Brummer, co-chair of the real estate group at Goodwin Law Firm. “They were standing by the sidelines for quite a while and now are willing to transact.”

Much of the institutional capital that was raised has been waiting exactly for this moment and are looking for more modest deals than the worst-case scenarios had projected, Brummer and others said. 

John Buran, CEO of the New York-based regional bank Flushing Financial, said the bank’s pipeline began to grow as far back as March in anticipation of the Fed’s pivot. More capital remains sidelined not because they’re waiting for steeper discounts, but because they’re waiting for further rate cuts. 

The Fed’s 50-basis-point cut in September was priced into the market well before Fed Chairman Jerome Powell acted, Buran said. Further cuts might not immediately trickle down to underwriting as the lending industry looks to recapture some of the margins they lost as Fed rates climbed. 

“The market expectations have been consistently ahead of the Fed, and kind of wishful thinking on the part of the market,” he said.  

The market’s positioning has left the funds raised to explicitly target highly distressed properties with limited opportunities, held back in part because of an expectation that the glut of multifamily supply coming online will be absorbed and the willingness of banks to work with sponsors on flexible loan extensions and modifications. 

Even the office sector, which is facing the most systemic issues as Americans reimagine what it means to be at work, has been buoyed to some extent by rising interest and incentives for adaptive reuses like office-to-residential conversations. 

“That has sort of pushed it out of the distressed bucket and sort of into the discount sale bucket,” Jabir said. 

There are distressed office sales happening throughout the country, just not at the clip that many had expected. Markets like Chicago and San Francisco have had high-profile sales approaching a 90% discount. New York has also seen office buildings trade at a steep loss.

Uncertainty around whether federal workers will ever fully return to their offices is helping to drive down valuations in Washington, D.C. But even those distressed buyers are executing strategies that involve significant capital investment to renovate, convert or redevelop the asset.

Michael Gevurtz, CEO of Philadelphia-based Bluebird Lending, said the shift in Fed policy will continue to bring more buyers to the table, which will only help to shore up any downward pricing pressure even as some landlords still need rate relief to make their properties profitable. 

“We're grinding through it,” Gevurtz said. “There's not some collapse that's happening. The more dry power that builds up, it inherently creates a situation where there's going to be less of a fallout in the market.”