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Real estate market crowded but not 'overly frothy,' Thor Equities chairman says

The real estate cycle may already have lasted longer than many expected, but it is not necessarily in danger of going off the rails soon, Joseph Sitt, chairman of Thor Equities, said Sept. 17.

"Is it overly frothy? ... No," Sitt said of the real estate market at Carmo Cos.' Real Estate Emerging Markets Meeting in New York. "I would say, other than super-luxury condo development, I feel like maybe because we suffered so much pain eight years ago ... because of the Great Recession I feel like people are a little bit smarter, a little bit wiser, a little more careful."

Sitt, who shared a keynote stage with Access Industries Inc.'s head of real estate, Jonah Sonnenborn, described continued robust inflow of capital from pension funds, sovereign wealth funds, family offices and other investors. Private equity firms have raised about $120 billion in aggregate each year for the last five years to deploy into real estate debt and equity, and roughly $300 billion of the total is still waiting to be invested.

Sonnenborn said he expects institutional investors to continue to allocate 9% to 11% of their portfolios into real estate. But he said the glut of capital on the sidelines seeking placement in real estate is dampening yields across the sector, and it could be indirectly stymieing deal flow.

"I don't know ... that having more capital has helped get transactions done," he said. "I know it's keeping yields lower, and is certainly keeping [deal] processes competitive. I see a lot of people sitting on their hands and that capital getting a little bit stale."

Sitt attributed the surplus of private equity capital on the sidelines to a new ethos of careful, deliberate investing, rather than a shortage of opportunities. Thor Equities' investors are not "throwing money at us in a foolish way," he said. He advocated for a more conservative investment approach overall in current market conditions.

"Anybody that's going to be looking for 25% and 30% [returns] in a market like this, they're going to get themselves hurt," he said. "You're better off to shoot for something a little more conservative."