Real estate investments: Challenging, but still popular

“Real estate investing very much is a story of what and where,” says Brian C. Adams, founder and president of Excelsior Capital. He serves on the board of Sirrom Partners, a single family office based in Nashville, Tennessee. Office real estate is a challenging market: Many workers who moved their offices home during the pandemic have shown no inclination to return. “If you are in an office tower in San Francisco or midtown Manhattan, it’s pretty painful now.”

Both for practical reasons and as way to strengthen family connections, family offices generally keep a portion of their portfolio in real estate. About 80 percent of family offices invest in real estate, and real estate makes up about 10% of the average family office portfolio, according to Goldman Sachs in its Eyes on the Horizon: Family Office Investment Insights report.

High interest rates and insurance premiums, among other issues, make the real estate market challenging. Still, family offices in Europe, Latin America and the United States anticipate increasing their real estate allocations over the next five years, according to the Global Family Office Report 2023 from UBS.

And real estate markets are, by definition, local — so the specifics vary greatly depending on the type and location of the property.

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Domestic commercial real estate is the largest segment of family office real estate investments, according to UBS. Its survey of family offices with real estate investments in 2022 found that 32% of those investments were in domestic commercial real estate, as compared with 30% in domestic residential real estate, 24% in international commercial, and 14% in international residential. The survey also found that 59% of family offices’ real estate investments are in the core or core plus categories: lower-risk properties that generate income.

And, of course, urban office towers and retail facilities — which have also suffered as consumers turn to online orders — are not all there is to commercial real estate.

“The dynamics of any type of real estate are specific to the area,” said Jason Mahoney, managing director of private capital for CYMI Holdings, the family office of the Clay and Mary Mathile family, the former owners of pet food maker the Iams Company. “There’s that old saying: location, location, location.”

Mahoney is looking at real estate with a mix of office and light industrial manufacturing spaces located just north of Dayton, Ohio. The area includes a very active transportation sector that is part of the supply chain for a lot of manufacturing in the Midwest.

Image: Cassidy Reed

“Up and down those long highway corridors, that particular type of commercial space has done pretty well and remains in pretty high demand,” Mahoney says. “Those are a little different than pure office buildings – these are not skyscraper buildings, they’re facilities that have a mix of office and production.”

Interest rates and insurance

Despite these opportunities, and the long-term positive outlook cited by investors, at the moment real estate investors face a number of challenges — first among them, higher interest rates and increasing insurance premiums.

Interest rates: Higher interest rates mean that treasury bonds and even cash can offer an attractive alternative to buying real estate.

“Interest rates are the main story for real estate,” Adams says. “For the first time in a long time, there is an alternative, which investors have not had since 2008. If you can get a risk-free return at 5% and you’re buying real estate at a 5% return, why would you take the risk?”

In addition, many investors who bought commercial real estate in the past few years will have to refinance in the next one to three years, likely at higher rates.

“A lot of these deals were underwritten in an environment when rates were ultra-low,” Adams says. “Even if you’re pretty conservative, you made some assumptions based on that. A lot of deals that were great are not going to be so great anymore. If you’re refinancing today or in the next few months, it’s a problem. Until rates go down, there’s going to be some pain there.”

Insurance costs: In some large states that have been hit hard by natural disasters like hurricanes or wildfires, insurers are raising rates significantly and in some cases are no longer offering coverage at all.

“Right now, insurance premiums are just outrageous,” Adams says. Some investors are able to get coverage by using a portfolio umbrella policy, he says, if they own a range of properties that include some in safer areas. “But if you have an orphaned asset in one of these markets, you’re just going to have to pay the premium.”

“In this moment, real estate is a very challenging asset class,” Adams says. “However, family offices often make longer-term investments — and real estate is likely to remain an important part of the portfolio for many.”

About the Author

Margaret Steen

Margaret Steen is the editor of FO Pro, The Family Office Professional. Based in Silicon Valley, she has written for Family Business Magazine for more than 15 years.


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