Ares Purchase of AREA Not Just About Geography

The pending purchase by Ares Management of AREA Property Partners reflects both an ongoing trend in institutional investment management and institutional investors’ still-rising interest in commercial real estate.

Time Warner Center, developed by AREA Property Partners and The Related Cos.

The pending purchase by Ares Management L.L.C. of AREA Property Partners L.P., announced in early May, is not just a major deal in its own right. It also reflects both an ongoing trend in institutional investment management and institutional investors’ still-rising interest in commercial real estate.

The transaction, the terms of which were not disclosed, will bring Ares Real Estate Group’s total committed capital to $8 billion.

“AREA’s expertise in value-add and opportunistic equity investing and mezzanine debt will complement our real estate group’s current capabilities in real estate private lending,” Tony Ressler, senior partner & chairman of Ares Management’s executive committee, said in a release. “The entire Ares Management platform will greatly benefit from AREA’s geographic reach, market insights, industry relationships and seasoned investment.”

Lee Neibart, AREA’s CEO, will become a senior partner of the Ares Real Estate Group, with he and John Bartling, also a senior partner, as global co-heads. William Benjamin, AREA’s head of Europe and India, will also become a senior partner of the group and will continue as head of Europe and India Real Estate.
Stephen Blank, senior fellow for finance at the Urban Land Institute, noted a small but key number of similar recent M&A transactions of institutional-type managers. These include not just the 2010 mega-deal in which CBRE Group Inc. paid $940 million for ING Real Estate Investment Management’s European and Asian operations and ING Clarion Real Estate Securities but also the December 2010 merger of Seattle-based Kennedy Real Estate Counsel and Vancouver-based Bentall.

In view of these, Blank told Commercial Property Executive “the rules are off” regarding the traditional emphasis on institutional investment managers growing organically.

These days, he said, “you’ve got to be very big or very sharp,” either global in scope or one of the local sharpshooters. In addition, entities like CalPERS would rather deal with fewer investment managers, making the Ares-AREA deal “a natural thing that’s been happening in the business,” Blank added.

Though some mergers work out great and others not so much, Blank points out that both the Ares and AREA management teams are well regarded and that the two companies have “very complementary skills,” so the resulting entity will be “a highly visible competitor.” 

Dan Fasulo, managing director at Real Capital Analytics Inc., drew a broad parallel between this deal and the August 2011 acquisition by Ares Management L.L.C. of the investment platform of Wrightwood Capital L.L.C., which added $1.2 billion in assets under management to Ares.

In a release at that time, Bartling said that the acquisition would enhance Ares Commercial Real Estate’s “ability to address a significant and growing need for financing solutions in middle-market commercial
real estate.”

Fasulo noted the current confluence of “large investment managers with growing platforms” with clients that suddenly want more and more real estate in their portfolios. “It’s definitely a trend” of investment managers wanting commercial real estate as part of their product offerings, he said.

He cited the recently mega-deal in which BlackRock Inc. announced it will acquire London-based real estate manager MGPA, giving BlackRock a further $12 billion in assets under management in Asia and continental Europe.

Expanding one’s geographic reach (as Ares and BlackRock both did) is good, Fasulo said, but the commercial real estate aspect is more central: “It’s more about buying the real estate experts.”

The acquisition is a good move for both Ares and AREA, Fasulo concluded. “These (M&A) deals don’t happen if the market isn’t moving in the right direction.”