Since the late 80s, private equity funds have experienced tremendous growth, becoming the dominant capital provider in commercial real estate markets. This growth began following the savings and loan crisis of the late 80s and early 90s, when private equity firms began opportunistic real estate funds.
These funds were formed with the specific purpose to acquire the distressed real estate assets of many failed savings and loan companies through the Resolution Trust Corporation. Many of these funds were able to achieve extremely high equity multiples and this initial success led to the creation of many more PE firms who were able to raise their own opportunistic real estate funds based on investors hopes they could achieve similar returns.
As the RTC ceased to be active, opportunistic funds were forced to begin investing in new real estate developments. And by the late 90s, real estate private equity had emerged as its own asset class, with many firms creating multiple funds with value add, core, and core plus strategies that focused on more stable parts of the market.
The effects of the past 30 years has led to private equity funds dominating the commercial real estate investing landscape. Last year, private equity firms raised $123.5 billion in funds for real estate, approaching the pre-recession peak of just over $140 billion in 2008. The following is a ranking of the largest real estate private equity firms in the United States by assets under management:
1. Blackstone: $101 Billion
Blackstone, helmed by global head of real estate Jon Gray, is the largest real estate private equity firm in the world. Since raising their first opportunistic real estate fund in 1997, Blackstone has been a dominant player in the industry with their simplified opportunistic philosophy of “buy it, fix it, sell it”. Just this month, Blackstone real estate surpassed a staggering $100 billion in assets under management. As part of a push towards a longer hold, core plus strategy, they recently closed the largest ever PE real estate fund at $15.8 billion. Furthermore, Blackstone recently acquired Chicago’s iconic Willis Tower, which they plan to enhance through value add renovations and a repositioning of the tower’s retail space.
2. Starwood Capital: $69.5 Billion
Starwood Capital recently closed its 10th opportunistic fund for global real estate investment. Led by CEO Barry Sternlicht, who formed Starwood Hotels and the successful boutique W hotel brand, Starwood Capital continues to be heavily invested in luxury hotel properties. Recently, Starwood launched the 1 Hotels brand with projects in Central Park, South Beach, and right under the Brooklyn Bridge that Sternlicht calls “the best thing we’ve (Starwood Capital) ever done.” At the end of 2015, Starwood announced plans for their biggest multi-family acquisition to date with a purchase of over 23,000 units from Equity Residential. This is part of the company’s new commitment to multi-family as US home ownership levels remain low.
3. Lone Star Funds: $65 Billion
Lone Star Funds was formed to acquire and resolve distressed bank assets in the wake of the savings and loan crisis. Shortly thereafter, current chairman John Grayken began to raise opportunity funds. To date, Lone Star has raised 16 private equity funds with total capital commitments of $65 billion. Lone Star Funds’ self-described investment approach is to identify developed markets where illiquidity is high and financial institutions have a need to reduce their assets. At the turn of the century, Lone Star found the opportunity to execute their strategy in East Asia, and focused most of their investment activity there. Lone Star began investing in the US once again in 2007 due to the market conditions in the wake of the financial crisis. At the end of last year, Lone Star Funds purchased Home Properties for $7.6 billion, expanding their multifamily portfolio and taking Home Properties private.
4. Brookfield Asset Management: $35 Billion
Headquartered in Toronto and New York, Brookfield Asset Management has raised several opportunistic, core, and value add funds to invest in assets globally. Brookfield owns a significant stake in General Growth Properties, the second largest US retail REIT, and Rouse Properties, another large mall owner and operator. Brookfield also owns 65% of multifamily property owner and operator Fairfield Residential as a part of a multifamily, value add fund that has helped the firm to purchase a stake in over 38,800 apartment homes. Last year, Brookfield also announced a $1.66 billion purchase of Associated Estates, a large multifamily REIT.
5. Tishman Speyer: $30.8 Billion
Founded in 1978, Tishman Speyer owns, operates, and develops properties in major metropolitan cities. Tishman has famously made its mark in the United States by purchasing and revitalizing iconic properties such as the Chrysler Building and Rockefeller Center. Additionally, Tishman has raised funds with core, value add, and opportunistic strategies. Most of the firm’s opportunistic funds have been focused on emerging markets like Brazil, China, and India. Recently, Tishman announced plans to sell high profile New York apartment community Stuyvesant Town-Peter Cooper Village to Blackstone for $5.3 billion, just below the amount they paid for the complex in 2006.
Private equity funds thrive on deals that require deep pockets and long holding periods. Private equity funds are often formed by institutional investors and high worth individuals with a “two and twenty” fee structure, meaning a 2% annual asset management fee, and 20% of any profits earned by the fund. Access for individual investors to large pools of real estate investments instead has largely come from public REITs and new business models. Fundrise, one of the pioneers in the space, has leveraged both technology and new federal regulations to offer investors the first ever low-fee, diversified commercial real estate investment available directly online to anyone in the United States, no matter their net worth¹.