Reporting lag fostering dispersion in public, private asset valuations
ARLEEN JACOBIUS
Most private market asset classes have yet to fully bake in lower asset values, resulting in tantalizing growth in their assets under management in 2022, a year when public market AUM fell across the board.
According to the results of Pensions & Investments’ latest money manager survey, most every private market asset class except hedge funds rose in the year ended Dec. 31 for U.S. institutional tax-exempt assets. Some of the largest increases included infrastructure, up 29.1% to $62.6 billion, distressed debt up 26% to $18.8 billion, privately placed debt up 20.8% to $138.2 billion and buyouts up 20.6% to $28.5 billion.
Hits to real estate first
One of the most favored, multifamily, witnessed a slump in transactions in 2022, said Sean Burton, Los Angeles-based CEO of multifamily real estate manager Cityview, which has $3.5 billion in assets under management.
Notwithstanding rent growth as well as high occupancy in its apartment properties throughout 2022, the rapid rise in interest rates and impact of fluctuations of capitalization rate, which is a measure of property values, the spread between the price a buyer is willing to spend and the price the seller is willing to sell was “fairly insurmountable,” Mr. Burton said.
“As a result, we continued to be patient with our capital and plan to wait for the distressed buying opportunities that we expect to hit the market towards the end of 2023 and 2024,” Mr. Burton said.
As for Cityview’s existing assets, they are “well capitalized with reasonable leverage levels and we don’t have an urgent need to sell anything,” he said.
Cityview executives are biding their time and waiting to sell properties in its portfolio in “a more advantageous seller’s market,“ Mr. Burton said. In the meantime, they are focusing on maximizing net operating income, controlling operating expenses, mitigating downside risk and executing on its business plans, Mr. Burton said.
Not all property types equal
Property types such as office and certain retail properties for which there has been a fundamental shift in how people utilize the real estate will likely have more write-downs, he said.
Still, stronger property types like industrial and multifamily have seen a dislocation, but it is expected to be temporary and from that opportunities will arise, Mr. Burton said.
Despite multifamily being a more favored asset class, certain apartment building portfolios and areas are facing more headwind pressures than others, he explained.
“Portfolios largely made up of assets that were banking on significant rent growth for their valuations and those in areas that are seeing an abundance of new supply — like the Sunbelt cities — are going to feel more acute pressures than those in supply-constrained markets,” Mr. Burton said.
Cityview expects to see distressed buying opportunities to hit over the next six to 18 months, with a relatively short buying window for quality distressed assets, he said.
