In 2019, well before the coronavirus pandemic, about three-fourths of family offices were investing in real estate. Amid the pandemic, family offices appear to be even more committed to real estate.
A May survey by investment bank UBS found that 45 percent of family offices were planning to boost their real estate allocations. In fact, family offices as a whole signaled they’ll be “far more aggressive” in buying real estate than other investors, UBS says.
Kris Ferranti, a partner in the real estate practice of New York City-based law firm Shearman & Sterling LLP, counts a number of family offices among his clients. Flush with cash, family offices are generally in a better position to invest in real estate now than they were during the Great Recession, he says.
In a Q&A with NREI, Ferranti discusses which real estate sectors are popular and unpopular with family offices, and how eager family offices are to capitalize on low interest rates and distressed properties.
This Q&A was edited for length, style and clarity.
NREI: For family offices, which commercial sectors are in favor now?
Kris Ferranti: Family offices tend to favor the multifamily property sector. This asset type has proven resilient during the current crisis and is expected to remain the real estate asset of choice for most family offices. Family offices enjoy the steady cash flow and the comparatively low risk profile inherent in multifamily assets.
Family offices were beginning to turn to industrial and logistics assets with greater frequency pre-COVID-19. Allocation to this asset type is expected to only increase as demand surges for storage and distribution space by online retailers.
Although hospitality has been severely impacted by COVID-19, this asset type has historically bounced back the quickest following prior downturns. Opportunistic family offices are expecting it to be no different following this crisis and are searching the hospitality sector for distressed, discounted pricing from unexpected market dislocation.
NREI: Which commercial real sectors are out of favor with family offices now?
Kris Ferranti: Family offices were steadily decreasing their exposure to retail assets pre-COVID-19, and any portfolio allocation with this asset type is likely to be reduced at a greater rate as a result of COVID-19. Retail has generally been devastated as a result of shutdowns and social distancing requirements, and investors are expecting long-term negative affects resulting from accelerated e-retail trends.
There is a great deal of uncertainty surrounding the office sector. The outcome of the remote work experiment is still pending, and some family office investors have paused immediate investment in this sector until there is more clarity. Some believe the remote work trend will be temporary, and as businesses begin to experience negative results to overall productivity, this sector will return to pre-COVID-19 demand.
NREI: Are there any U.S. markets that family offices are staying away from or investing more heavily in?
Kris Ferranti: Family office investors continue to focus on secondary and tertiary markets. With large-cap institutional and private investors concentrated on primary gateway markets to fulfill their sizeable investment mandates, sponsors often turn to family offices as a preferred source of capital for deals in secondary and tertiary markets. COVID-19 has only reinforced this trend as people and businesses in primary markets continue at an increasing rate to migrate to these other markets.
NREI: How are family offices reacting to the pandemic as it relates to real estate investment allocations compared with the Great Recession?
Kris Ferranti: Family offices are more eager to find opportunities to pick up real estate assets at distressed prices, especially with financing at historically low interest rates. It is no secret that many of the real estate investments made during the last downturn were among the most profitable. If you look at the period from August 2008 to June 2010, U.S. commercial property prices fell by about 35 percent. And prices over the last decade or so have more than doubled. This time around, family offices as a whole have more capital at their disposal. Most family offices have also expanded operating capabilities and real estate sector expertise. So, by and large, family office investors are in a better position to invest today than they were during the Great Recession.
NREI: Overall, how would you describe the current level of commercial real estate investment in the U.S. on the part of family offices? Are they more active? Less active?
Kris Ferranti: During the early stages, when COVID-19 first arrived in the U.S., many family offices were in a holding pattern. Some were in defense mode, taking action to support their existing portfolios. Some were waiting for a level of stabilization and for credit markets to normalize. Some were just generally apprehensive since the origins of this crisis—a public health issue—are very different from the Great Recession. And as values steeply declined, many existing owners were trying to avoid fire sales in the hopes of a strong economic recovery, or they were biding their time through forbearance agreements with lenders, government assistance and other temporary measures. But in the last few months, investment activity has been ramping up. Family offices and sponsors are sizing up opportunities, and we are now beginning to see opportunities emerge and move forward.
NREI: How would you characterize the economic outlook for family offices that invest in commercial real estate?
Kris Ferranti: Family offices typically invest a sizable portion of their entire investment portfolios in real estate. Pre-pandemic, the portfolio allocation to this asset by family offices seemed to be steadily increasing. It is generally accepted that a well-diversified portfolio includes some allocation to real estate.
Family offices typically take a longer-term perspective in their investments, and the value of patient capital is realized in no asset more so than real estate and during no period more so than periods of distress and volatility. Real estate has historically been and is likely to continue to be a significant contributor to multi-generational wealth for family office investors.