Real estate has always been a prime investment area and source of wealth for family offices and high-net-worth individuals because of its historical advantages — durable income, hedge against inflation, and portfolio diversification. That trend has only accelerated in the wake of the pandemic’s devastating impact on the commercial office market and the effect of stubbornly high interest rates on the housing market in general.
It is now the second-most-popular alternative asset in family office portfolios after private equity, with 78% of U.S. family offices invested in real estate. According to the UBS Global Family Office survey, the average allocation to real estate was 13%, which has remained fairly consistent during the larger volatility of the market.
The lure of the fairly conventional sector has even attracted some of Silicon Valley’s most forward-thinking visionaries. Recently, OpenAI CEO Sam Altman made waves with his family office by buying up $85 million of high-value properties in San Francisco and Napa, California. That trend may reflect a desire by tech industry leaders to counterbalance the high-risk nature of their ventures, said Richard Crenian, founder of the Toronto-based real estate investment management firm ReDev Properties.
Real estate investing by family offices runs the gamut from loans and direct deals in developments to putting money into real estate investing funds, “providing funds a channel to access capital from ultra-high-net-worth individuals and families directly,” said Henry Lam, associate vice president of research insights at the Preqin data analysis firm.
The appeal of the sector is likely to increase this year, with several real estate investing trends that should benefit family offices, said family office members who invest in the sector, as well as investment advisers and consultants.
Short-term lending
With banks increasingly pulling back from commercial real estate, family offices and wealthy investors are increasingly making investments in short-term real estate debt in anticipation that interest rates will remain high for the foreseeable future.
James Ryan, who founded his New York-based real estate investment firm RYCO Capital with significant backing from his family, said bridge loans to developers are particularly attractive to more risk-averse family offices. “Some of the older people in the family who are not looking for home runs, they're not looking to build a big business, they're just looking to invest their capital, and they really like the credit part of the capital stack,” Ryan said.
Such loans usually go to developers or owners doing renovation projects, for which banks often aren’t making loans. Ryan cited a recent example in Manhattan’s West Village where RYCO put in one-third of the capital for renovation work, and a firm with family office money lent the remainder.
“They don’t operate the property day to day," he said. "They make the loan, and we report to them, and they’ll just sit back and get 10% if it goes well. … If I can make 10% with some downside protection, that’s almost a no-brainer.”
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Making it rain in the Sunshine State
Florida continues to attract more real estate investment, with four of the top five cities in the country for property value increases. Tampa stands out with a 71.6% property value increase over the past five years, followed by Orlando, Jacksonville, Boston and Miami. The riskiest short-term rental market: San Jose, California.
Irving Padron, Deering Companies CEO & luxury home developer in Coral Gables, Florida, says that "private capital continues to pursue high-quality assets and premier locations. Due to the scarcity of developable land, Florida has seen a boom in acquisitions of aging condominiums and subsequent demolitions particularly along the waterfront." He notes that, with insurance costs increasing, owners are willing to sell and part ways with their units than keep up with maintenance.
Meanwhile, overseas opportunities are becoming attractive to more adventurous investors, with demand for luxury apartments and homes in India outstripping supply and single-family residential and rental in Europe among the highlights of recent studies.
Multifamily residential, multiuse conversions and industrials
“If you own multifamily and you're in at the right value, a lot of your net operating income flows to cash,” Ryan said. “That's why I think it's probably uniquely attractive to family offices or permanent capital because you can generate that cash flow.”
With retail, lots of opportunities are opening up to convert them into shared workspaces, health and fitness gyms or medical clinics. That’s not the case with commercial office space, which can be more difficult to convert because of their floor plans, say real estate investors.
Conversions have become more common since the pandemic, with the decline of the commercial office market. “Such transformations not only bring financial rewards to investors but are also beneficial to communities by providing essential services while revitalizing aging commercial districts,” Crenian said.
In the wake of the pandemic, investing that once went into commercial office developments has steadily been shifted to industrial uses. “Industrial warehouses have generated strong and consistent results over the last several years, while the office sector has struggled due to the work-from-home movement and the migration of workers from big cities,” according to a recent report by Franklin Templeton. “We believe that these secular trends will continue.”
Land acquisitions
Some entrepreneurial private developers, often backed by family offices, are acquiring land in order to meet insatiable demand for new single family homes. "Savvy private investors are partnering with large national developers, in some instances public companies, in order to feed their pipeline needs, including both for-sale and rental product," says Padron.