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A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide for wealthy investors and consumers. Register to receive future editions, straight to your inbox.
Private investment firms of the ultra-rich are snapping up the nation’s real estate as the market’s recovery continues to stall, family office investors told Inside Wealth.
With persistently high interest rates and geopolitical conflicts keeping many investors on the sidelines, family offices can afford to make opportunistic bets when 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 over the past six months. Realm took advantage of some good deals, like buying an office building in San Francisco for about 21 percent of what it was last traded for and what it might cost to build today.
“We looked at it and said, ‘Hey, San Francisco took a beating, but we think technology is going to continue to be a very robust environment, and we continue to believe that’s going to be the primary driver of the U.S. economy going forward.’ We don’t think San Francisco is going anywhere,” he said. “It appears that this statement is accurate, given that we are now trading title to leases or purchase and sale agreements on several of these properties.”
King said some families are nervous about deploying their money during these turbulent times, but more are interested in taking advantage of low valuations.
“It’s a difficult time to live through, as a citizen, but it’s an interesting time as an investor, because it’s this period that allows you to get the best price,” he said.
Matthew Cohen, a partner at Declaration Partners, the investment firm anchored by the family office of billionaire Carlyle David Rubenstein, said the firm’s long-term investment horizon allows it to capture opportunities that traditional asset managers can’t.
Declaration Partners closed its second real estate investment fund in October, raising approximately $303 million. The group has closed a slew of deals in recent months, such as signing a $50.1 million master lease for three storefronts in New York’s SoHo. While current tenant rents are below market rates, Declaration Partners’ lease extends for 25 years, with an option to extend until 2091.
“A lot of institutional funds look at opportunities like that and say, ‘If I can’t execute a business plan in a year and a half, or two or three years, that’s not fast enough,'” Cohen said. “It took someone who had a long-term perspective to say, ‘I’m willing to hold a longer-term contract to wait out these leases,’ and have the patience and flexibility to work with a private landlord to come up with a mutually beneficial structure.”
Surveys of family offices have revealed ambivalence toward real estate investing, but those conducted in the United States have been more optimistic.
A JP Morgan Private Bank survey, released in February, found that 35% of U.S. family offices plan to increase their exposure to real estate, while only 24% of their international peers say 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 all respondents.
“Whenever inflation becomes a problem, people start investing in things they can see and touch,” said Jennifer Nellany, a real estate attorney with Cozen O’Connor.
Jason Ozur, CEO of wealth manager Lido Advisors, said that even with low acquisition prices, investors must consider 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 discounts of 20 to 30 percent from replacement costs, he said. The company focuses on major cities like Salt Lake City, Denver and Dallas, he added.
Ozur said cash flow and portfolio diversification provide more incentive for clients to invest in real estate. He also described real estate as a tax-advantaged asset, citing strategies such as depreciation deductions and 1031 exchanges, which allow real estate investors to defer capital gains by reinvesting the gains in a like-kind property. Clients can also gift real estate to their children at reduced values over time, he said.
As for data centers, the most popular asset class in commercial real estate, Nellany said family offices are struggling to invest at attractive prices. She also said that some family offices, particularly those with a philanthropic focus, are concerned about the environmental impact of data centers.
Real estate investor Chaz Lazarian is doubling down on his investment in office real estate, often considered the least attractive area of commercial real estate, through his company Elle Family Office.
Lazarian said he was scooping up distressed assets at deeply discounted prices. He said he acquired the old Home deposit headquarters building in Atlanta and its debt for 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.
Although that property was retained as an office building, he razed others to build multi-family housing. Unlike many family office executives, Lazarian does not invest for the long term, aiming to flip properties in two to three years.
“I think generational wealth can be created by taking certain risks,” he said. “This opportunity didn’t exist in 2007 and 2008, and we just want to start again and repeat as many times as possible until the market dries up.”