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What Family Offices, HNWIs Think of Retail Assets in the Current Market

Risk tolerance is a key differentiator determining who is willing to buy in the sector.

The U.S. retail sector has taken a beating due to lockdowns and social distancing and the continued acceleration of e-commerce sales during the COVID-19 pandemic. Much of the retail sector was already grappling pre-COVID-19, and investment sales have dropped significantly.

In spite of overall caution in the investment sales market, some family offices and high-net-worth investors (HNWIs) have been looking at this as a time of opportunity. So are they pursuing any retail investments with all of the added challenges during the pandemic? Are these wealthy investors looking for potential distressed deals, or are they sitting on the sidelines?

“It really depends on the family office,” says Michael Straneva, global transaction real estate sector leader for professional services firm EY. “Everybody has a different strategy. I don’t see a rush of people out there, but there are family offices that are taking a look at opportunities now in locations or product types that they think maybe this is a good time.”

For example, Straneva has seen select high-net-worth individuals and family offices eyeing high street retail. These may be multi-generational families, for example, he notes.

“We have seen some people look at opportunities in those [high street] areas, even though in some cases, we’ve seen rents dropping,” Straneva says. “But if some of those irreplaceable locations are up for sale, we’ve seen high-net-worth individuals looking.”

Part of it, he says, is simply availability. The idea of being able to buy a property on Los Angeles’ Rodeo Drive or Chicago’s Miracle Mile is attractive to select investors, he notes. In those cases, it would be smaller blocks that the family offices or HNWIs would look to control, according to Straneva.

“I’m not saying this is a rush and everybody is doing it, but I have seen some of that [interest] in those areas,” he notes. “They really see a value of owning these places that, frankly, only so many people can have those sorts of locations.”

On the other side of the spectrum Straneva also notes that there’s some interest in “coupon-clipping, very high-quality retail” for family offices, perhaps in 1031 exchange situations. “We’ll see whether that 1031 goes away or not under the new administration,” he notes. “But you do see people thinking about essential, single-tenant retail and how does that fit in their portfolio, given what’s out there.”

The assets that are getting interest in this category could be quick-serve restaurants or other property types with high-credit tenants.

Other perspectives

“With a few exceptions among the families that I deal with, no one is really looking at retail right now for a lot of the obvious reasons,” notes Scott Kapp, partner at global law firm DLA Piper. Kapp works in the firm’s real estate practice where he represents family offices, entrepreneurial clients and a diversified group of private companies, including private equity and venture-backed companies.

“There are a couple families I work with that are contrarian as they have had operating businesses,” Kapp adds. For example, it could be a family that founded and built up a grocery store chain, so they understand the grocery and retail business, or a family that has an operating business with a heavy retail component.

Kapp notes that the type of retail being pursued depends on where the family made its money. Families typically invest in the same areas where they have experience.

“I represent a family that made their money in pet food,” he notes. “They understand pet food sales and pet food retail, so that doesn’t fit into the grocery-anchored or Walgreens- or CVS-anchored centers, but it happens to be an industry that they understand. They can understand how the Petcos of the world might operate.”

Even those families, however, are looking ahead to what could happen over the next six to 12 months.

Many tenants stopped paying rent,” Kapp says. “Maybe if you’re in a grocery-anchored center, the grocer is still paying rent, but the mom-and-pop shops are failing. They see retail as something that will continue, but there’s going to be a lot of restructuring. Their money is being parked on the sidelines to see what happens. Then they’re going to pick off some opportunities as they arise.”

One retail subsector that wealthy families have been attracted to during the pandemic is retail centers located around national, big-box retailers like Target or Costco, Kapp says. Even though these big, national retailers typically own their own real estate (and the families would not own the Target or Costco locations), they drive traffic and demand to the larger center, he notes.

Looking more at direct investing

One trend that Kapp has seen when working with families over the last decade is they have moved toward direct investing, and that trend continues.

According to a recent study released by data and research firm Fintrx, more than half of the approximately 3,500 to 5,000 family offices globally invest directly today.

“When family offices look at how they’re going to deploy some of their capital and where they can have more impactful investments, they’re looking to invest directly in companies that might be experiencing distress, but are otherwise good companies to invest in, own and operate,” Kapp notes.

“I have seen more of that,” he says. “It’s everything from manufacturing and healthcare to food and beverage and technology.”

When it comes to commercial real estate, rather than putting money into a Blackstone or an Apollo or some other large institutional fund, many wealthy families are making investments themselves, according to Kapp. Or sometimes they will create a fund or an investment vehicle that they form with other families that have the relevant industry knowledge.

Research finds increasing appetite for real estate

Meanwhile, a May survey by investment bank UBS found that 45 percent of family offices were planning to increase their real estate allocations. That finding aligns with the research NREI has conducted on the topic

“The appetite for real estate investing is absolutely there,” says Jonathan Tunner, director of private investment opportunities at Family Office Exchange LLC (FOX), a peer-to-peer network for ultra-wealthy families and their family offices.

When it comes to retail, Tunner says there are two mindsets: One, is the investor who’s concerned about the future when it comes to the duration of factors like reduced occupancy, rent roll, and ultimately, NOI.

“If you’re getting into a retail property that’s underperforming, you have to look at how long are you willing to own the asset while it’s underperforming? Is it a 12-, 18- or 24-month window of decreased financial performance?” Tunner says. And then you make the decision on whether or not to invest in that asset with the uncertainty around ultimate duration and level of financial underperformance.

The other mindset is for buyers with meaningful dry powder who can buy cheap and hold onto the investment while it’s still financially underperforming, Tunner notes. These buyers see bargains within distressed retail assets.

“That mindset begins to shift into looking at the asset price dislocation or the discount vs. from what the price would have been a year ago, for example.”

“If you’re getting into a piece of property that’s trading at, for example, 25 percent less from where it was—and if you have the capital and the reserves of dry powder—you’re saying, ‘Yeah. I’m happy to weather 12, 18, 24 months of lower NOI coming out of a property in exchange for this deeper discount.”

Tunner says many family offices and high-net-worth investors still see the value in bricks-and-mortar retail despite the acceleration of online retail sales, because not everyone wants to shop via Amazon or People still like the experience of going to the store and buying products in person, he notes.

“In retail, a lot of people have come to the conclusion that yes, it might be a little bit scary right now, and there may be some long-term impacts with COVID still to come, but I think people still want to get out. They want to go to local restaurants, local shops… and buy stuff.”

Family offices are also long-term investors, Tunner points out.

“The big takeaway is that families tend to think much more long term,” he notes. “I think families that are in the retail space say, ‘You know, we see that it will turn back around.’ We will probably see some twists and turns that we weren’t expecting, but long term, they see it as a valuable part of the overall real estate ecosystem.”

TAGS: Real Estate
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