Can (Jon) Tavsanoglu, Founder & Chief Investment Officer at Caldera Real Estate Ventures, an external CIO & Asset Management Platform.
Real estate secondaries, which enable private investors to exit early by selling their shares in portfolios or single assets, had a strong year in 2024. Secondaries transactions reached $16.4 billion globally in just the first three quarters of last year, according to CBRE Investment Management.
Although a niche strategy, the role of real estate secondaries has been increasingly recognized in addressing funding and exit challenges. Since the beginning of 2024, my company, an external chief investment officer and real estate asset management firm, has been frequently working on complex CIO assignments involving investors seeking liquidity and working capital, where secondaries and recapitalization were alternative solutions.
These experiences have shown me both the potential and the considerations real estate investors need to keep in mind when exploring secondaries.
Current Trends
In addition to the growing popularity of RE secondaries as an investment strategy, there are some key trends investors should consider:
General partner-led opportunities dominate. Although GP-led RE secondaries declined from 2022 to 2023, these transactions still outnumbered limited partner-led secondaries in terms of market volume ($6.2 billion vs. $3.6 billion), according to data from Ares.
North America leads the market. In 2023, U.S.-based partnerships alone accounted for 62% of the total volume of RE secondaries, Ares also said.
Net asset value write-downs are making secondaries more attractive. By the end of 2023, the total real estate assets under management contracted from the 2021 peak to $4.1 trillion (registration required for full report). This decline is likely due to managers lowering the reported value of their assets, which could be driven by a gradual increase in the appraisal cap rate. This trend promotes secondaries sales by narrowing the pricing gap between buyers and owners.
The increasing prominence of real estate secondaries, particularly GP-led transactions, can offer investors greater flexibility when looking to participate in RE secondaries. Meanwhile, a narrowing pricing gap could provide attractive entry points for investors.
Real Estate Secondaries Outlook
I expect RE secondaries to continue serving as an appealing alternative to primary transactions. For investors aiming to capitalize on the recovery stage of the cycle, secondaries may offer a cost-efficient way to deploy capital in a shorter time frame. Several key market dynamics are informing my outlook:
Property Repricing
The Green Street Commercial Property Price Index (registration required) said the all-property index increased by 4.8% in 2024. However, this is still 17.8% below the 2022 peak. A 9.6% decrease in transaction dollar volume in Q3 of 2024 further suggests a market unable to establish stabilized values. I anticipate a tighter bid-ask spread in 2025, which could pressure primary transactions and boost activity in the secondaries market.
Demand From Portfolio Rebalancing
In 2025, 17% of institutions are planning to lower target real estate allocations by 140 basis points, according to the 2024 Real Estate Allocations Monitor. The report also said institutions exceeded the 8.3% annualized target returns on real estate from 2012 to 2022 by 180 basis points. This tells me they may be willing to exit at a discount, providing an entry point for secondary investors.
Pinched Liquidity
By 2028, $2.2 trillion in commercial real estate loans are set to mature. In today’s environment, assets acquired at high valuations and low interest rates during the pandemic could face insufficient proceeds or increases in debt service after refinancing. As selling in the primary market poses challenges, recapitalization may be a more attractive option to create liquidity.
Fundraising Challenges
As of September 2024, global real estate fundraising dropped, and the top 10 real estate funds accounted for 38% of the total capital raised by Q3. This further pressures small- to midsize sponsors to create liquidity.
Advantages And Opportunities
There are many advantages investors could see with secondaries investing. First, stalled primary transactions have turned RE secondaries into a buyer’s market. Additionally, for cash flow-focused investors, RE secondaries could offer reduced duration and business risks, bypassing early-stage challenges like cost overruns. LP-led deals could offer access to diversified portfolios across sectors, while GP-led continuation funds tend to focus on growth assets. CRE secondary transactions, especially GP-led, may also feature renegotiated terms favoring investors.
There are also many opportunities investors considering RE secondaries can explore, such as:
• Direct secondaries: These target non-fund vehicles and may offer more room for negotiation, which could allow for more customized investments.
• Profit sharing: Minority interest solutions combine discounted purchases with profit-sharing for alpha generation. This can benefit all parties; the new investor takes a co-GP role, the sponsor gains capital to advance the business plan and prior investors see added asset value.
• Credit secondaries: In 2023, 51 real estate debt funds were launched. However, 32% of U.S. private debt managers expanding into this sector lacked prior RE experience, which can pose performance challenges. Additionally, primary debt fund investors, especially insurance companies, are expected to face increased scrutiny on real estate debt exposure, which could further drive credit secondaries sales.
• Targeted sectors: Industries benefiting from digitization, such as data centers, have the potential for higher risk-adjusted returns. CRE has struggled in recent years, though some believe it could be poised for recovery this year. Multifamily has long-term growth potential, but some regions may experience a slow recovery due to pandemic-driven oversupply.
Challenges To Consider
Investors considering RE secondaries as an investment strategy should be prepared for a few challenges, particularly the expertise involved. The process often begins with sourcing portfolios/assets that require capital stack restructuring or LPs seeking early exits. The opaque nature of these opportunities creates a high barrier to entry that the broader financial brokerage community or investors without active industry exposure may not be able to penetrate.
For appropriate risk management, I recommend a comprehensive underwriting and due diligence process that merges top-down and bottom-up approaches. Additionally, investors should consider the role of leverage during negotiations of terms, as this can influence alpha generation. I also want to note that these investment structures, along with the taxes and regulatory filing obligations, can be complex. Investors will need to navigate the process carefully. In doing so, they can position themselves for success and make informed decisions moving forward.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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