Record M&A Levels in 2015, but Stay Patient

With real estate M&A volume set to top 2014’s post-crisis highs, RSM practice leader Richard Edelheit warns much greater focus needs to be paid to due diligence.

Real estate mergers and acquisition volume in 2015 could reach post-crisis highs, thanks to the continued wave of capital targeting the asset class.

In the first quarter of 2015, global real estate M&A deal flow hit $113B, making it the second-most-targeted industry after healthcare and the highest first–quarter volume for real estate since 2007, according to data provider Dealogic.

Given such levels, RSM national real estate industry practice leader Richard Edelheit says he’s “excited and optimistic” that 2015 M&A activity could reach new highs. “Personally, I think it’s going to be even better this year [than in 2014],” he says.

And it is the unprecedented level of capital flows—particularly cross-border—into commercial real estate that’s driving the trend. “What you have to really do is follow the flow of money,” Edelheit says. “You have a huge capital infusion that’s coming into the marketplace on a global basis, as well as with institutional investors and private equity investors.

“I’m from Chicago. I see money coming in from New York, like Blackstone acquiring the Sears Tower. There’s such great liquidity in the marketplace, which we haven’t seen [at this level] since pre-crash.” And he notes that, of course, “real estate professionals like to transact.”

Predicting greater activity in the real estate investment trust (REIT) space, Edelheit says roll-ups will continue to be a key focus in 2015 as companies look to monetize the value of their real estate portfolios given current property valuations.

But despite an expected increase in M&A deal flow, Edelheit warns patience will be key for every transaction team in 2015. “There’s so much capital in the marketplace, and so much competition, [that] decisions may be made based on the availability of capital to invest versus sound investment fundamentals including proper scrutiny and necessary due diligence of each investment opportunity,” he says.

The firm recently assisted a sovereign wealth fund on its acquisition of the largest portfolio of wholly-owned industrial properties in the U.S., including doing the lease abstraction work for the portfolio’s 117M-square-foot of assets. Edelheit says there is a growing trend—and need—for due diligence work to be done twice as quickly today as six years ago, but to a much greater depth. “So if you had 60 days five or six years ago, you’ve got half that time to do the very same thing, and at a higher level of scrutiny.”

The danger of not investing in the due diligence process, he adds, is getting caught up in market momentum, driven by the increased capital flows into real estate. “That’s why I say, ‘Have patience,’ because otherwise investors might find themselves in a [market] bubble.”

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