Interest rate woes drive private equity investments in real estate to 5-year low

Private equity and venture capital deal value in real estate plunged to its lowest level since at least 2019 as concerns over the trajectory of interest rates linger.

Year to date through May 28, aggregate deal value stood at $4.88 billion, down from $6.55 billion in the same period in 2023, according to S&P Global Market Intelligence data.

The fall in investment in the sector is linked mainly to the interest rate cycle, according to Pete Witte, global private equity lead analyst at EY.

"In the US, we came into the year expecting five to six rate cuts. Now we're down to maybe one rate cut," Witte said.

Management at Blackstone Inc., a major private equity investor in real estate, made similar comments on the firm's first-quarter earnings call, citing the upward movement in interest rates as well as the heightened risk in the office sector, particularly in the US, as the two main headwinds.

"Both of those peaked back in October [2023] and that has really worked its way through the market," Blackstone President Jonathan Gray said. However, the firm believes commercial real estate values are bottoming, providing the foundation for an increase in transaction activity.

In the second quarter to May 28, deal value was at $3.10 billion, an increase from the $1.78 billion reported in the full first quarter.

– Download a spreadsheet with data in this story. – Read about private equity entries in May. – Read about private equity deals in Japan.

Biggest deals

In the biggest deal so far in 2024, KKR & Co. Inc., through its KKR Real Estate Partners Americas III fund, acquired a portfolio of 19 purpose-built student housing properties from Blackstone's Blackstone Real Estate Income Trust Inc. for $1.64 billion.

The US and Canada secured the largest amount of private equity-backed investments in 2024, with $2.62 billion. Europe tallied the highest number of deals at 39.

On a per-sector basis, real estate operating and management companies secured the bulk of private equity-backed capital in 2024 year to date, with $3.61 billion, followed by hotels, resorts and cruise lines, with $603.7 million.

Outlook

Private equity investment in real estate has sought other property segments such as datacenters, driven by the widespread adoption of artificial intelligence.

"Datacenters have been a powerful theme for the last two to three years, and AI has supercharged that," Witte said. "It's something that you tend to see in the early stages of these transformational technologies where you don't necessarily know what the applications are going to be, but you do know what the picks and shovels are going to be."