It’s no surprise that family offices are approaching all new investments with greater caution amid recent market volatility. At the same time, many families are holding onto cash that they are looking to put to work. They may target real assets in the coming years with real estate remaining one attractive target for that capital.
“Real estate has always been a solid investment during inflationary times, and it can have tax advantages while also producing current cash flow. All three of those components are especially compelling in the economic times that we face today,” says Alex Bhathal, executive chairman and managing partner of Revitate, an investment firm backed by the Bhathal family investment office, RAJ Capital, invests primarily on behalf of high-net-worth individuals, RIAs and other family offices. Revitate plans to continue to deploy capital in 2023 across its two main strategies, opportunity zone investments and multifamily acquisitions.
High inflation and the rapid rise in interest rates have disrupted capital markets and slowed commercial real estate investment activity, but there are sectors and niches that continue to be attractive, Bhathal says. “Real estate by its nature tends to have several tax advantages, and tax-advantaged investing has remained popular for family offices,” he adds.
According to new research from Aeon Investments, 90% of family offices expect to increase investment in illiquid assets over the next two years. The study surveyed family offices in the U.S., U.K., Switzerland, Germany and the Nordic region of Europe. According to Aeon, some of the key drivers behind the focus on illiquid assets are the need to protect wealth from macro uncertainty, as well as a desire to invest in assets—such as floating rate debt—that provide a natural hedge against inflation.
In addition, a 2023 Family Office Industry Briefing Series conducted by FINTRX and Charles Schwab also shows that nearly two-thirds of both single-family and multi-family offices are interested in real estate. However, investment advisors agree that the family office sector is a tough sector to generalize as the allocations and strategies individual families are applying to commercial real estate vary widely. “Every family is unique, and they have unique needs,” says Roger Staiger, senior real estate advisor at Pennington Partners, a $2 billion multi-family office based in Washington, D.C. Allocations run the spectrum from real estate families that have high concentrations of real estate investments in their portfolios to those families that have perhaps recently sold a business and are just beginning to diversify with real estate investments, notes Staiger.
Desire to put cash to work
Wealth preservation is often a top priority among family offices, and families are moving cautiously with a heightened focus on understanding the nuances of deals and risk management. “They are still active in real estate, but families are holding back more at this moment, which is understandable given what’s going on with the banks,” says DJ Van Keuren, founder of the Van Keuren Family Office Real Estate Institute and co-managing member of Evergreen Property Partners.
During COVID, families built up dry powder and then waited to see signs of a recovery before investing. However, a lot of families missed the big shift to the upside, notes Van Keuren. He is seeing that same strategy play out now with families that are sitting on capital and waiting for opportunities that can deliver upside, such as distress related to maturing debt and negative leverage situations or repricing of assets due to higher interest rates.
New research from the financial services firm Ocorian supports the view that family offices have dry powder that they are ready to deploy. In its global survey of 130 family office investment managers, 99% agreed that family offices have been overweight in cash for the past two years and are now ready to invest again. In addition, 87% anticipate an increase in the risk appetite of their clients over the year ahead.
“One of the nice things about working with our clients is that they have a high degree of intellect and an appreciation of risk construct. They understand that while there is volatility and uncertainty in the market, that also means that uncertainty can produce opportunistic buys and opportunistic development,” says Staiger. Especially among families that have made their money in real estate, they understand that while the market might be disrupted, they can be opportunistic. “So, we are out looking for deals where patient capital can help,” he says. That being said, families have throttled back a bit on return expectations due to current market conditions with expectations that real estate investments generate blended returns that generally fall between 7% and 11%, adds Staiger.
Multifamily remains favored sector
Preferred asset classes for family offices follow broader investment market trends. The focus remains firmly on multifamily, and in particular, cash-flowing multifamily that doesn’t require a heavy value-add component. Industrial is another favored category due to the secular trends driving demand for space. There is less appetite for assets that are perceived to be riskier, such as hospitality, office and some areas of retail.
Family offices like multifamily because it’s a fairly easy asset to understand, and people generally think there is another five years left on the demand for multifamily, especially with higher interest rates making it more difficult for people to buy houses, notes Van Keuren.
In December 2021, Revitate partnered with Cherry Tree Capital Partners to acquire, reposition, and manage multifamily real estate properties. Since launching that strategy, Revitate and Cherry Tree have acquired five workforce housing properties totaling $96 million in acquisition value. Revitate likes the cash flows and the attractive risk-return profile in workforce housing. In addition, Bhathal sees continued opportunities ahead to acquire assets at attractive values in a less competitive environment. “We believe that the opportunities in 2023 for return are greater than what we have seen in several years,” he adds.
Revitate also is continuing to deploy capital into commercial real estate developments located in opportunity zones. “Family offices tend to have a long-term mindset, which is consistent with the structure of the incentives and also the long-term nature of investing in developments,” says Bhathal. “So, we see opportunity zones as an area of continued interest.”
Families invest across different structures
Pennington Partners typically sees families that are investing across the spectrum of different vehicles ranging from direct investments and partnerships to private equity funds and public REITs. For example, some families are expressing more interest in investing as co-general partners on development deals or funding a larger portion of the capital stack with a mix of equity and debt. In addition, the lingering effects of the pandemic are continuing to influence investment strategies. There is a common view that investing in office is like catching a falling knife. Families also are wary of retail due to the continued rise of online shopping, says Staiger.
According to a survey conducted by the Van Keuren Family Office Real Estate Institute, 70% of families are investing directly into real estate property. Families often favor direct investment, because they have more control and more visibility into an investment, and they are wary of high fee structures in other vehicles, notes Van Keuren.
However, more challenging market conditions could shift more focus away from direct deals and into other managed structures where there is demonstrated expertise. Just about everyone who has invested in real estate since 2012 has made money, because everything has been going up, notes Van Keuren. It is going to be a tougher market to navigate, and families may realize that maybe they didn’t make the best decision on a purchase, or maybe their developer partner doesn’t have the experience needed to handle a downturn. “Once things start going awry, I think families will go back into funds,” he adds.