The world's biggest real estate investors are sitting on piles of cash, preparing for once-in-a-lifetime opportunities created by the pandemic.
With economies around the world sputtering, commercial real estate prices are expected to come down. How much they'll fall is the key question.
Sellers are currently willing to concede discounts of around 5%, while bidders are hoping for about 20% off pre-pandemic prices, said Charles Hewlett, managing director at Rclco Real Estate Advisors. That estimated gap, which is likely wider in specific cases, has put a freeze on deals.
"The mantra for anything that hasn't gotten started is: delay, defer and, in many cases, renegotiate," Mr. Hewlett said. "If I'm going to have vintage May 2020 on my books, I want to be able to demonstrate to my investors that I got an exceptionally good deal."
Private equity firms across the globe hold an estimated $328 billion in dry powder for real estate deployment, according to the data firm Preqin Ltd. Prior to the crisis, asset prices had been pushed up as investors chased yield in riskier corners of the property market. Now, Blackstone Group Inc. and Brookfield Asset Management Inc., the largest real estate investing companies, are expected to hunt for bargains among the fallout from the pandemic.
For now, social distancing rules and a virtual travel halt have stalled transactions and led to speculation that prices will drop in coming months.
"The physical restrictions taking place are mostly preventing new deals from happening," Tom Leahy, a London-based senior director at Real Capital Analytics Inc. said. "Far fewer active buyers, far fewer deals, an increase of deals falling out of contract — those are the preludes to seeing prices fall when the market does come back."
The volume of deals in Europe plunged 65% in April from a year earlier, according to Mr. Leahy. U.S. and Asian markets faced similar drops.
Asia, where the pandemic began, is likely to recover faster than Europe or America as Taiwan, South Korea, Japan and parts of China reopen for business, according to Richard Barkham, chief economist for CBRE Group Inc. Transactions in the Americas will fall an estimated 35% this year, compared with a roughly 25% decline in the Asia-Pacific region, he said.