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Over the last handful of years, family offices have consistently increased their portfolio returns by investing into real estate. In 2018, I attended and conducted presentations, moderated panels and participated in panels at family office and real estate conferences throughout the U.S., Mexico and the U.K.; participated in television shows, podcasts and radio shows not only as the guest but also as the host through the Family Office Real Estate Institute; I gained tremendous insight into what family offices were doing last year — and developed some perspective on what I expect them to be doing in the upcoming year.
Based on these experiences and my firsthand work for a single family office, here are eight predictions I have for the top trends for family offices and their real estate investments in 2019:
1. A significant portion of family offices believe there will be a downturn coming in the next nine to 18 months. With the exception of family offices that created their wealth in real estate, the rest will decrease their allocations to real estate or keep them the same — very few will be looking to increase their allocations to this asset class. This will keep a family office’s typical allocation to real estate between 20-25% of their total portfolio, which is higher than the typical percentage that has been allocated to real estate by family offices in the past.
2. With the majority of family offices expecting to maintain a balanced allocation strategy in their real estate portion of their portfolios, family offices are still going to expect outsized returns from their real estate investments between 14% and 15%.
3. Direct investing has been a growing trend for family offices over the last two years, and that trend will continue in the coming year. This will be followed by an interest from family offices in investing in Opportunity Zones.
4. Though Opportunity Zones are a hot topic for 2019, the majority of families will still be hesitant to jump right in. When family offices do decide to participate in an Opportunity Zone investment, the majority of the capital will be directed toward real estate. Family offices will invest in these zones both directly themselves and as a limited partner.
5. Family offices that do invest in Opportunity Zones will be driven by the tax benefits the program provides. This may cause some families to overlook the investment itself, and a good number of family offices may invest into less-than-profitable projects — especially as the majority of Opportunity Zone managers will be selling the “tax benefits” rather than the projects themselves.
6. Multifamily properties will continue to be the property type of choice for family offices in 2019. Although value-add properties will be a highly sought after investment strategy, family offices are keeping their eyes open for distressed opportunities as many families are expecting a downturn around the corner.
7. While foreign family offices like to invest into major cities and port cities like New York, Miami, San Francisco and Los Angeles, U.S. family offices will focus primarily on secondary markets for their real estate investments.
8. Single-family offices and multifamily offices are expected to continue to grow as the creation and concentration of wealth continues. The common question that will continue to emerge will be, “Are those that say they are a family office really a family office?” As the term becomes a buzz word rather than a definition of what it actually represents, I expect we will see a rise of companies that hold themselves out as a family office when trying to raise money for, in particular, Opportunity Fund investments.
With real estate being a well-established asset class for family offices, capital will continue to flow into real estate in 2019 and beyond. But as this source is patient capital, it will be based upon the unique rules of the family offices.