During times of economic uncertainty, family offices often have a leg up on institutional investors. Family offices can be more agile in making decisions, can hold assets for longer, and they don’t face pressure to distribute dividends to shareholders or deliver short-term returns to investors. And, in fact, evidence shows that family offices plan to step up their investments in commercial real estate in the near term amid the current market volatility.
Increasing Interest in Commercial Real Estate
RIAs and other family office consultants have noted that family offices have amassed a significant amount of dry powder since the pandemic and have yet to deploy it in many cases. An inflationary environment and an anticipated increase in distressed situations are making it attractive for family offices to step up their real estate investments.
A global survey conducted on behalf of fiduciary services provider Ocorian found that 33% of family offices said their allocations to commercial real estate would increase by 50% or more. Similarly, research by Goldman Sachs found that 27% of institutional family offices planned to increase allocations to private real estate and infrastructure. Additionally, a report published by FINTRX found that 64% of family offices expressed interest in investment in commercial real estate, a level of interest higher than in any other asset class.
Financial services and real estate were also the greatest sources of wealth creation for single-family offices, according to FINTRX findings. Therefore, it is clear that family offices are increasingly looking towards real estate as a lucrative investment opportunity.
Matt Riccio, a senior analyst and director at RSM US LLP
Expanding Risk Appetite
Experts with RSM US LLP agree with the assessment that family offices are poised to step up their investment in commercial real estate. They also note that family offices feel comfortable taking on a greater level of risk in their real estate ventures than they have previously and that they might become a major source of creative capital solutions in the commercial real estate space.
At the same time, family offices continue to look for transparency in financial reporting and more flexible venture structures from their real estate partners, leading them to become more selective about which firms they work with.
Gene Garcia, a real estate senior analyst and principal at RSM US LLP, highlights that family offices enjoy the long-term appreciation and tax advantages that real estate investments provide. Real estate offers various tax benefits, such as depreciation and low taxable income rates. Family offices also value like-kind exchange transactions that allow for deferred capital gains tax.
Matt Riccio, a real estate senior analyst and director at RSM US LLP, points out that family offices have the ability to invest patient capital, which aligns well with the long-term nature of the real estate cycle. Family offices are becoming more creative in their deployment of capital through bridge lending, mezzanine lending, and short-term funds.
Seeking Transparency and Flexible Structures
Transparency in financial reporting is critical for family offices. As they often have internal real estate professionals, they seek to understand the financials and gain insights into costs. Additionally, family offices operate under various structures, such as partnerships, family holding companies, and private trusts. They consider tax impacts on income and net benefits for each structure, making flexible venture structures essential.
Building strong, trust-based relationships is key for family offices. They desire reputational firms and partnerships that can offer generational relationships. Family offices are willing to participate in co-general partner (co-GP) arrangements, which enable them to have a say in operational aspects and often result in better economic results. These arrangements also provide family offices with more control over the holding period and decision-making processes.
Selective Partnerships and Market Turbulence
Family offices are becoming more selective about the types of investor partnerships they enter into. They prioritize working with reputable firms and conducting thorough due diligence. The turbulence in the market has prompted family offices to seek talented individuals to help them make investment decisions and better understand market opportunities.
While family offices invest in all sectors of real estate, multifamily properties are currently popular due to their performance and inflationary pressures. However, family offices remain sector-agnostic and will consider investments in all sectors as long as the deal works.
Embracing Transparency and Compliance
The expansion of regulations on private fund advisors by the SEC has further emphasized the importance of transparency and compliance. Family offices, with their long-term nature of investment and private fund investor status, could benefit from enhanced accountability in the real estate sector.
In conclusion, family offices are poised to become a significant force in real estate investment. Their ability to make agile decisions, hold assets for longer periods, and take on greater risks sets them apart from institutional investors. As family offices step up their investments in commercial real estate, they are seeking transparency, flexibility, and strong partnerships. With their unique advantages and growing interest, family offices are set to shape the future of real estate investment.
