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Massive take-private deal may bookend real estate cycle

The real estate cycle may be closer to its end than expected, and a significant M&A deal across the public-private divide could mark the close of it.

At iGlobal Forum's Real Estate Private Equity Summit this week in New York, Peter Ciganik, managing director at the investment firm GTIS Partners, put forward a thesis that the end of the real estate cycle may already be upon us. Some players in the space, citing strong fundamentals, low debt loads and the still-favorable supply-demand balance, have said real estate's run can continue for a few more quarters.

Ciganik posited that a major a take-private deal could be forthcoming, given the discounts in the public real estate investment trust market.

"That will be the signal, for me, that that is the true peak," Ciganik said on a panel at the March 28 conference.

In an interview, Ciganik cited Blackstone Group LP's $36 billion acquisition of Equity Office Properties Trust in 2007 as an instructive historical precedent. Private equity players are now sitting on billions of dollars of dry powder, and the significant REIT discounts may inspire a major private player to deploy a pile of it tens of billions in one go.

"And it might be a good deal. I'm not saying that would be bad. But that was really, truly the very peak of the market," Ciganik said of the Blackstone-Equity Office deal.

The retail segment, where public REIT discounts are particularly pronounced, could present a few attractive opportunities, he said. Indeed, Brookfield Property Partners LP's play for GGP Inc. may be just the beginning of the fireworks.

Ciganik, along with many others at the conference, gave an overall favorable assessment of the real estate industry's health. Debt levels are low, and new construction has been kept largely under control. These factors, and the immense amount of capital on the sidelines, may mean real estate lags the broader markets in any move into a prolonged downturn, he said.

"It's not a bad place to put your capital in a mild downturn," he said of real estate. "In a mild downturn it's the best place to be."

Ciganik said he expects the single-family residential market, among all the subsectors, to continue to grow, given the particularly low new supply in that segment and millennials' expected move away from the rental apartment market. Attractive secondary markets like Austin, Texas, and Denver will be the front lines of that gradual shift.

"Perhaps there will be a little bit of a change in the mindset, and [some] of them will stay in the cities and try to make it work," he said. "But once you have two or three kids, and you can't buy that expensive condo or pay $7,000 in rent, you are looking at options. And what are your options? You need to move to the suburbs."