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A version of this article first appeared in CNBC's Inside Wealth newsletter with Robert Frank, a weekly guide for high-net-worth investors and consumers. Register to receive future issues, directly to your inbox.
Private investment firms of the ultra-wealthy are buying up domestic real estate as the market recovery remains stalled, 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 while investing for the long term.
Travis King, CEO of Realm, said the collective of about 100 families has invested about $100 million in Northern California real estate in the past six months. Realm has taken advantage of bargains, such as buying an office property in San Francisco for about 21% of what it cost last time and what it could cost to build today.
“We looked at it and said, 'Hey, San Francisco has been hit, but we believe that technology will continue to be a very strong environment, and we continue to believe that that will be the main driver of the American economy in the future. We don't think San Francisco is going anywhere,'” he said. “It appears that statement is accurate, based on the fact that we are now negotiating roles in leases or purchase and sale agreements for several of these properties.”
King said some families are nervous about using their money during these turbulent times, but more are interested in taking advantage of low valuations.
“It is a difficult time to live, as a citizen, but it is an interesting time as an investor, because it is the time in which the best prices are obtained,” he stated.
Matthew Cohen, a partner at Statement Partners, the investment firm founded by the family office of Carlyle billionaire David Rubenstein, said the firm's long investment horizon allows it to take advantage of opportunities that traditional asset managers cannot.
Statement Partners closed its second real estate investment fund in October, raising about $303 million. It has made a number of deals in recent months, including signing a $50.1 million master lease for three stores in New York City's SoHo. While current tenant rents are below market rates, Statement Partners' lease spans 25 years, with the 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. “It required someone who had a longer-term perspective to say, 'I'm willing to hold a longer term to wait for those leases to expire,' and the patience and flexibility to work with a private landlord to come up with a structure that was mutually beneficial.”
Family office surveys have indicated ambivalence toward real estate investing, but those in the United States have been more optimistic.
A survey by JP Morgan Private Bank, published in February, found that 35% of US family offices planned to increase their exposure to the real estate sector, while only 24% of their international peers said the same. A whopping 40% of respondents also reported no allocation to real estate.
However, family offices that cited inflation as the top risk to their portfolios reported an average allocation of 16.3% to real estate, double that of the overall group of respondents.
“Whenever 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, chief executive of wealth manager Lido Advisors, said that even with low acquisition prices, investors have to pay attention to many factors, such as leverage costs and rising insurance costs, to beat inflation. Lido Advisors has been able to invest in attractive multifamily properties at 20% to 30% discounts on replacement costs, he said. The firm focuses on major cities such as Salt Lake City, Denver and Dallas, he added.
Ozur said cash flow and portfolio diversification are stronger attractions for clients to invest in real estate. He also described real estate as a tax-efficient asset, citing strategies such as depreciation deductions and 1031 exchanges, which allow real estate investors to defer capital gains by reinvesting the proceeds in a property of the same type. Customers can also gift real estate to their children at reduced prices over time, he said.
As for data centers, the most popular asset class in commercial real estate, Nellany said family offices find it difficult to invest at attractive prices. He also said that 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 firm, Elle Family Office.
Lazarian said he buys distressed assets at deep discounts. He said he acquired the first one. house deposit headquarters building in Atlanta and its debt of about $21 million, paying about 18 cents on the dollar when it acquired it in October compared to what its private equity owner paid in 2019.
While that property remained as an office building, it has demolished others to build multi-family housing. Unlike many family office directors, Lazarian does not invest for the long term, aiming to sell properties in two or three years.
“I think you can create generational wealth by taking some risks,” he said. “This opportunity didn't exist in 2007, 2008, and we just want to rinse and repeat as many times as we can until the market dries up.”
