General Electric recently garnered attention with its decision to sell over $23 billion in commercial real estate assets and wind down its commercial finance arm.
The deal illustrates major forces reshaping how U.S. companies finance and invest in commercial real estate. Prolonged low interest rates have buyers lining up to acquire commercial real estate portfolios for their attractive yields. Meanwhile, rising real estate prices have whet seller appetites, giving giant regulated conglomerates such as GE the opportunity to profitably exit. A Green Street Advisors index of commercial property shows prices 15% higher than the peak of the last cycle in 2007.
“You really have a perfect market to be selling financial service assets, so you’ve got slow growth, low interest rates, lots of liquidity, people searching for yield,” GE Chief Executive Jeffrey Immelt told CNBC on Friday. “So you’ve got a bunch of stuff in the portfolio that people are going to look at and say, ‘In a slow growth, low interest rate, low-yield world, you know, anything that gives you yield is extremely valuable.’ And these are safe and secure, well-run assets.”
Companies who sought out large sector purchases did well through the 1990s and mid-2000s, but the 2008 financial crisis limited access to short-term borrowing. Companies such as GE found themselves squeezed in the middle, London’s Financial Times noted. Big traditional banks, such as Wells Fargo, can lend money using cheap deposits, and smaller firms can offer products and services to commercial real estate owners and investors in a more agile, less regulated environment. GE could do neither.
Many U.S. companies are looking for simpler, more straightforward ways to offer products and services. It’s another verdict on the future of complicated conglomerates. Commercial real estate finance is moving into the hands of specialized providers that can serve borrowers with a more nimble and entrepreneurial approach, from direct lending to crowdfunding. And with a major player like GE Capital heading for the exits, the window opens even wider for disruption.
“It’s the end of an era,” Columbia Business School professor Bruce Greenwald told the New York Times about what GE’s move means for the industry. “Specialization matters. You have to be focused.”