2020 Was Terrible for Real Estate Investing. Will 2021 Be Better?

Fundraising and deal value plummeted during the pandemic — but real estate investors are betting on a recovery, according to Preqin.

Brendon O'Hagan/Bloomberg

Brendon O’Hagan/Bloomberg

With office buildings emptied, hotels left vacant, and commercial tenants struggling to pay rent, it should come as no surprise that 2020 was a challenging year for real estate investing.

In private equity real estate, deal making plummeted in both number and value, with the total deal value declining 50 percent from 2019 levels, according to Preqin data. Deal numbers, meanwhile, dropped from 9,848 in 2019 to 5,979 last year.

This slowdown in deal making was accompanied by a decline in fundraising, with 283 funds closing in 2020, compared with 494 funds in 2019. As in other alternative classes, large funds run by established managers had the most success in fundraising, with the ten biggest funds accounting for 34 percent of the total capital raised.

In total, private equity real estate funds secured $118 billion in investor commitments in 2020, a 34 percent decline from the previous year’s total, Preqin said.

“Restrictions on travel, lockdowns, and reduced physical interaction among market participants hit fundraising and played a major part in deal declines,” David Lowery, head of research insights at Preqin, said in a statement.

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Despite these challenges, institutional investors appear to be betting on a recovery. Among those surveyed by Preqin, 45 percent said they planned to maintain their allocations to real estate over the next 12 months, while 36 percent intended to invest more in real estate.

Still, investors and managers pointed to several obstacles for return generation in real estate over the coming year, with about half of investors and nearly as many managers predicting that asset valuations would remain challenged. Other concerns revolved around the exit environment, geopolitical landscape, and competition for assets.

Competition, according to Preqin, is likely to be high due to the amount of dry powder, or uninvested capital, that has piled up over the past year.

“When deal activity does recover, office and industrial, key sectors that generate interest from allocators, should benefit,” Lowery said. “But with dry powder standing at a record $324 billion, fund managers and investors could face an increasingly competitive environment in the year ahead.”