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The Real Estate M&A Boom

Surprising though it may seem, real estate is poised to be one of the hottest sectors for mergers and acquisitions growth in the coming year. Due diligence activity in real estate during the first half of 2015 was up 57%, according to Intralinks’ Deal Flow Predictor which forecasts M&A activity six months into the future, the largest increase for any industry. What’s more, our early count indicates deal negotiations in real estate continued strong during the third quarter.

This may be surprising because investors have been anticipating rising interest rates, which ultimately should act as a brake on such a finance-dependent industry. But so far this year, real estate M&A is on a roll. Announced deals in North America were up 37% during the first half of the year compared to the year-ago period, while deal value was up 94%.

The trends are encouraging. Prices for property, both commercial and residential, have come bouncing back, fueling excitement in the sector. An expanding economy continues pushing rents higher. Occupancy rates are strong, and a key metric for real estate owners, same property net-operating income, is healthy.

Importantly, investors anticipate yields – rents paid by tenants – and occupancy rates will continue rising. That’s helping to drive activity in real estate M&A, which is reflected in the prices paid for acquisitions. Enterprise Value/EBITDA multiples in real estate rose during the first half to 22.4X from 20.5X during the year-ago period, according to Thomson Reuters TRI +%.

Private equity firms have made big real estate purchases, and are also investing in commercial real estate brokers, exemplified by TPG Capital’s recent $2 billion purchase of Cushman & Wakefield to combine it with real estate services firm DTZ, which itself had merged earlier in the year with Cassidy Turley.  As private equity firms invest more in real estate, they’ll need to sell off properties to earn performance fees.

Activist investors are also gaining a foothold in the sector. The hedge fund Land and Buildings is pushing MGM Resorts MGM +0.00% International to transform itself into a real estate investment trust and spin off its real estate holdings, which management is seriously considering.