Barbarians At The Gate

You didn't think the more than $16 billion raised in non-traded REITs so far in 2013 was going to go unnoticed did you?  For several years big money Wall Street firms have been playing on the periphery of independent broker / dealer capital through their third party management of business development companies.  Now we have the first (at least first that I can think of) large scale investment by a Wall Street investment firm into a non-traded REIT.  According to a filing yesterday, Starwood Property Trust has made a $250 million preferred equity investment into Griffin Capital Essential Asset REIT to help the REIT close on an 18-property acquisition from Columbia Property Trust.  Yesterday's filing was a press release and states that as part of the acquisition financing, "the balance of the (over $500 million) acquisition was funded with $250 million of preferred equity provided by an affiliate of Starwood Property Trust, Inc."  The terms of the financing were disclosed today in Griffin Capital Essential Asset REIT's 10-Q.

I don't see deals like the Griffin Capital Essential Asset REIT / Starwood preferred equity tranaction as a one time occurrences.   The money flowing to non-traded REITs is too great to ignore.  Total equity in 2013 will likely exceed $20 billion.  This is expensive, small ticket, retail money that hedge funds and private equity have previously ignored.  Combine the large capital inflows to a concentration of sales - American Realty Capital Properties and Cole Real Estate Investments, which are merging, represent a 2013 market share of more than 58% - and it's market ready for new, well capitalized entrants.   While the big Wall Street private equity shops and hedge funds want a piece of a $20 billion passive money pie, the pitfalls are not so obvious.

Independent broker / dealers are a fickle bunch operating on razor thin profits.  They extract a price for doing business because non-traded REITs offer one of the few remaining sources of revenue.  Once a non-traded REIT figures out the broker / dealer override (based on sales) then it's time to get solicited for a conference fee (just because), without which the non-traded REIT gets no tacit or explicit endorsement or exposure.    Each broker / dealer is a little kingdom and the marketing and due diligence areas act as fiefdoms within the realm.  Independent broker /dealers make the idea of herding cats seem like a military parade.  Throw in that independent broker /dealers have an innate distrust of Wall Street because many independent brokers started with big Wall Street brokerages and are now independent for a reason, and you have an immediate barrier.   Hedge funds and private equity firms are going to realize, many for the first time, the true meaning of a "best efforts" selling agreement.