Family offices make opportunistic bets on real estate

A version of this article originally appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to high-net-worth investors and consumers. become a member to receive future editions straight to your inbox.

Private investment firms owned by the ultra-rich are buying up domestic real estate as the market recovery continues to stall, family office investors told Inside Wealth.

While persistently high interest rates and geopolitical conflicts keep many investors on the sidelines, family offices can afford to make opportunistic bets when investing for the long term.

Realm CEO Travis King said the collective of about 100 families has invested about $100 million in real estate in Northern California in the past six months. Realm has benefited from bargains such as purchasing an office property in San Francisco for about 21% of its last trade and what it would cost to build today.

“We looked at it and said, ‘Hey, San Francisco got beat up, but we continue to believe that technology will continue to be a very robust environment, and we continue to believe that that will be the primary driver of the U.S. economy going forward. We don’t think San Francisco is going anywhere,'” he said. “Based on the fact that we are currently paper trading on leases or purchase and sale agreements for many of these properties, that call appears to be correct.”

King said some families are nervous about giving away their money in these turbulent times, but more are interested in taking advantage of low valuations.

“It’s a difficult time to go through as a citizen, but it’s an interesting time as an investor because this is the best time to price it,” he said.

Matthew Cohen, a partner at Declaration Partners, the investment firm backed by Carlyle billionaire David Rubenstein’s family office, said the firm’s long investment horizon allows it to capture opportunities that traditional asset managers cannot.

Declaration Partners closed its second real estate investment fund in October, raising approximately $303 million. It has signed a number of deals in recent months, such as signing a $50.1 million master lease for three stores in New York City’s SoHo. Although the tenants’ current rents are below market rates, Declaration Partners’ lease covers 25 years with an option to extend through 2091.

“A lot of institutional funds look at opportunities like this and say, ‘If I can’t execute a business plan in a year and a half, two or three years, that’s not fast enough,'” Cohen said. he said. “It required someone with a long-term perspective to say, ‘I’m willing to contract longer term to wait out these contracts,’ and the patience and flexibility to work with a private owner to create a mutually beneficial structure.”

Family office surveys indicate hesitancy towards real estate investment, but polls in the US are more optimistic.

A JP Morgan Private Bank survey published in February found that 35% of U.S. family offices plan to increase their real estate exposure, while only 24% of their international counterparts said the same. 40 percent of the survey participants reported that no allocation was made to real estate.

However, family offices that cited inflation as the biggest risk to their portfolio reported an average allocation to real estate of 16.3%; this is twice the overall participant pool.

“When inflation becomes an issue, people start investing in things they can see and touch,” said Cozen O’Connor real estate attorney Jennifer Nellany.

Jason Ozur, CEO of asset manager Lido Advisors, said despite low purchase prices, investors must pay attention to many factors to beat inflation, such as leverage costs and rising insurance costs. He said Lido Advisors can invest in attractive multifamily properties at a 20% to 30% discount on renovation costs. He added that the company is focusing on major cities such as Salt Lake City, Denver and Dallas.

Özur said that cash flow and portfolio diversification make customers more interested in real estate investment. He also described real estate as a tax-efficient asset, citing strategies such as depreciation deductions and 1031 exchanges that allow real estate investors to defer capital gains by reinvesting their earnings in a similar property. Customers can also gift real estate to their children at a discounted value over time, he said.

When it comes to data centers, commercial real estate’s most popular asset class, Nellany said family offices are difficult to invest in at attractive price points. He also said some family offices, especially those with a philanthropic bent, are concerned about the environmental impact of data centers.

Real estate investor Chaz Lazarian is doubling down on office real estate, often considered the least attractive area of ​​commercial real estate, through his company, Elle Family Office.

Lazarian said he bought distressed assets at significant discounts. He said he bought the old one Home Depot It paid about 18 cents on the dollar for the Atlanta headquarters building and its nearly $21 million in debt when it bought it in October, compared to what the private equity owner paid in 2019.

While that property was kept as an office building, others were razed to build multi-family housing. Unlike many family office managers, Lazarian does not invest long-term and aims to dispose of his properties within two to three years.

“I think generational wealth can be created by taking some risks,” he said. “This opportunity didn’t exist in 2007 and 2008, and we just want to rinse and repeat as much as we can until the market dries up.”