Family Offices Focused on These CRE Sectors

January 27, 2021

As family offices shake off the remnants of 2020, they’re turning their attention to which types of commercial real estate investments to pursue in 2021.

“The impact of the pandemic and the shift of power in Washington have given commercial real investors a lot to consider, both from an economic and fiscal perspective,” says Matthew Koelliker, president of M360 Advisors, an investment manager based in Ladera Ranch, Calif.

Koelliker and other experts say family offices are considering an array of commercial real estate investments this year—from suburban multifamily projects to manufactured housing communities and distressed properties. A survey conducted over the summer by Citi Private Bank found that 59 percent of family offices had increased their allocations to direct investments for the following 12 months, with real estate rated as the No. 3 asset category.

Here’s a rundown of some of the investment options being weighed by family offices in 2021.

Suburban multifamily
Family offices are “very bullish” on multifamily properties in suburban areas, says Manny de Zarraga, executive managing director at commercial real estate services provider JLL. Why the suburbs? As de Zarraga and others point out, lower cost suburban markets have gained favor, while higher cost urban markets have lost some luster, in part because the rise of remote work during the pandemic has enabled many people to do their jobs from practically any location.

“The COVID-induced recession impacted urban submarkets much more than suburban ones in 2020. As a result, suburban submarkets will lead the multifamily sector’s recovery in 2021, while urban submarkets will lag,” researchers with commercial real estate services provider CBRE say in its 2021 forecast for the multifamily sector.

Ryan McClellan, a family office consultant and private wealth adviser at UBS, says he’s seen steady interest in multifamily properties among his clients, despite concerns about the inevitable collapse of government protections for cash-strapped renters.

Single-family rentals
Elsewhere in the housing market, McClellan and others note family offices are increasingly attracted to single-family rentals (SFRs). Just as they are with suburban multifamily properties, de Zarraga says family offices are bullish about SFRs.

A 2018 report from the Terner Center for Housing Innovation identified SFRs as the fastest-growing segment of the housing market, driven by factors such as the mortgage foreclosure crisis and the debt loads saddling millions of Americans.

A third-quarter report from John Burns Real Estate Consulting and the National Rental Home Council highlights “solid, sometimes insatiable demand” for SFRs in many markets, with a 97 percent occupancy rate for same-property portfolios across 55 U.S. metro areas. According to investment platform Roofstock, SFRs make up 15 percent to 30 percent of all single-family homes and 20 percent to 50 percent of all rental properties in the top 20 U.S. markets.

A key indicator of the popularity of SFRs: builders like D.R. Horton, LGI Homes, Meritage Homes, Taylor Morrison and Toll Brothers have stepped up their commitment to build-to-rent homes.

Manufactured housing communities
Family offices also are eyeing manufactured home communities as investment opportunities, according to de Zarraga.

A report published in the summer by JLL notes investors are gravitating toward manufactured home communities because of their recession-resilient performance and growing valuations. In the second quarter of 2020, the per-pad price at a mobile home community averaged $50,792, up 6.6 percent from the first quarter of 2020 and 26 percent year-over-year. Second-quarter stabilized occupancy stood near an all-time high of 93.5 percent.

“As the supply of manufactured homes has been slowly declining due to zoning restrictions and core development expansion, the increased need for affordability is expected to push net demand upward,” the JLL report states.

Industrial
The boom in e-commerce and the need for vaccine storage have propelled demand for industrial space, and family offices have taken notice. JLL’s de Zarraga says family offices are drawn to industrial properties due to their long lease terms, creditworthy tenants and low cap rates (below 4 percent).

CBRE predicts net absorption of industrial space will approach 250 million sq. ft. in 2021, which would be above the previous five-year annual average of 211 million sq. ft. “This will spur new construction, which is already near record levels, and strong pre-leasing of speculative projects,” the company forecasts.

Distressed properties
Family offices will likely be able to seize on more opportunities to buy distressed properties in 2021, as relief money from lenders and the federal government evaporates, according to M360’s Koelliker. He anticipates many of those opportunities will pop up in the pandemic-battered retail and lodging sectors.

“Early on in the pandemic, we talked to several family offices who were gearing up to deploy capital toward more distressed investment opportunities across the commercial real estate landscape. Those distressed opportunities did not play out as quickly as some anticipated and, as a result, many family offices remained on the sideline in 2020,” Koelliker says.

Repositioning of distressed properties will be a component of investment strategies for many family offices in 2021, according to Milton Vescovacci, a shareholder at the West Palm Beach, Fla.-based Gunster law firm and a member of the firm’s corporate practice.

“Asset valuations are high in many sectors and asset classes. Overpaying for an asset ahead of a potential decline in the economy and increasing tax and regulatory environment are a concern for family offices,” says Vescovacci, whose clients include family offices. “However, because there is a lot of money to be invested looking for yield, some investors will take riskier bets.”

UBS’ McClellan echoes that assertion. As family offices gain more confidence in an economic recovery, their risk tolerance will increase following a sharp focus in 2020 on high-quality, stabilized assets, he notes.

“After traditional real estate sectors such as office and retail were upended, we saw our clients prepare for a more nuanced strategy through a lens that reflects their views of what real estate will look like in a post-COVID environment,” McClellan says. “Their approach to 2021 is an evolving one, as uncertainty about the future of office and retail remains, despite the vaccine rollout.”

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