One of the questions that I get asked all the time from other family offices is, “Where are the opportunities in real estate?” The answer to that in many ways is subjective, as there are different types of properties, and there may be a preference that one family is more comfortable with than another.
Let’s take multifamily for example. Multifamily is overwhelmingly the property type of choice when it comes to the kind of real estate investments that family offices tend to invest in. The problem is that if any family office is currently being pitched an opportunity to invest in a Class A multifamily deal, they should run the other way, in my opinion — at least for the time being. There is an excessive amount of Class A multifamily apartments on the market in many locations across the United States, and I trust we are going to be seeing a downturn in the next nine to 12 months, which should last six to nine months before things start to move up again. This downturn combined with the rising cost of construction will make value-add and ground-up construction deals hard to pencil and weigh on the returns for the foreseeable future, not only from the costs being out of wack but also because the vacancy levels will be higher than anticipated as the excess inventory burns off.
The point is that although your family office may have an affinity for a particular property type, it doesn’t necessarily mean that it is the best place to invest at the current time. Property types do run in cycles and the areas that I see as current opportunities are industrial, hotels and, believe it or not, retail. Yes, retail: The small strip malls will not be affected by the “Amazon effect.” After all, can you get a haircut online or buy a cup of coffee or get your nails done? Perhaps in the long-distance future, but not in my lifetime at least.
The other way family offices can be strategic about real estate investment is to look at what markets the opportunities are moving to. I love Seattle and consider it home, but today’s new investor has missed that boat. And although I suspect there is a good 10-year run left in Denver, what about the future cities like Boise, Idaho; Nashville, Tennessee; and Charlotte, North Carolina? Now, to invest in these locations, family offices will need to work with a local operator, but that all comes back to the importance of screening and working with a great sponsor or operator, as that is the person who is going to be executing the transaction. Once again, the first hurdle you have to get past is the sponsor; after that, the deal is secondary.
Family office capital is patient capital, and that needs to be taken advantage of — especially when it comes to real estate. Unlike institutional investors, families can wait things out and don’t have to put money out in a hurry. And above all, family offices that did not create their wealth in real estate must understand what I learned 16 years ago: If you think you found the perfect real estate investment and you don’t win the bid or are unable to acquire the property you were going after, you will find another one just as good, if not better, tomorrow.