Why Family Offices Remain Aggressive on Multifamily Investment
By Marc A. Hershberg August 2, 2023 5:20 pm
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Coming out of an era of low interest rates and ample liquidity, many of the world’s richest families have made — or are in the planning stages of — major shifts in asset allocations, as seen in the latest UBS Global Family Office Report 2023. The survey covers 230 family offices, each handling investments for a single wealthy family. These families possess a combined net worth of almost $500 billion, translating to an average of $2.2 billion per family.
Family offices’ allocation to alternative investments is changing, with a significant drop in direct private equity exposure from 24 percent to 14 percent, while allocation to hedge funds has risen from 4 percent to 7 percent, according to UBS. The trend toward active rather than passive investment management holds true globally. Alternatives represent 45 percent of total portfolio investments, and approximately one-third of family offices plan to increase their exposure to real estate when capital becomes more available and valuations are lower.
According to Goldman Sachs’ 2023 family office report (OGS), 30 percent of their clients plan to increase their exposure to the real estate sector — in particular, multifamily residential — in the next 12 months. They are cautious about retail and office space due to rising vacancy rates, online shopping and the remote-work culture.
The UBS report highlights the top concerns for family offices in 2023. While high inflation and insurance remains a worry, geopolitical concerns have taken the top spot. In the United States, the state of the economy and the possibility of a near-term recession are the biggest concerns among family offices.
Often, family offices have high expectations for returns, are knowledgeable about wealth planning, and plan to invest generationally. The OGS report also mentions that family offices will play a more significant role in investing in private markets, as limited partners and direct co-investors in commercial real estate — especially multifamily residential across the U.S.
Most family offices invest through specialized managers, except for private real estate, where ultra-high-net-worth families prefer to invest directly with leading CRE sponsors and syndicators. A significant number of them plan to increase their investments in U.S. multifamily and other lower-risk asset classes like industrial, rather than taking higher perceived risks.
Family offices find multifamily residential real estate appealing, as approximately one-third of them plan to increase their investment in this asset class in the next year, while less than one-third aim to maintain their current investment exposure.
Real estate valuations are driven by supply and demand dynamics. Currently, there is an oversupply of office and retail space, but a shortage of industrial and multifamily. The changing socio-economy, with millennials entering their peak earning years and increasingly shopping online, is boosting growth in the industrial sector and driving demand for fulfillment centers across America.
While the office sector is experiencing headwinds due to increased remote work, rising vacancy rates, and tight lending conditions, multifamily is a bright spot due to suppressed demand and a housing shortage totaling several million units. Job growth and migration from high-tax to low-tax states also offer opportunities in this sector.
The issue with mega-sponsors is that their investing activity is often correlated with the flow of capital into and out of their funds. This led to a lot of peak market purchases just before the Federal Reserve began raising rates. Therefore, this newly increased and sustained appetite toward multifamily residential assets will allow “private smaller sponsors” to directly compete and have an edge over “larger institutional competitors,” which finds companies like our own portfolio’s growth shifting progressively toward more core/core-plus assets with a longer-term and multigenerational outlook.
In short, family offices have ample capital available and are considering various investment opportunities. Multifamily real estate, known for its risk-averse nature, tax advantages and steady cash flow, is a particularly attractive asset class. However, family offices are cautious due to the ongoing turbulence in the banking sector and the persistent risks of inflation.
Marc A. Hershberg is a managing partner and CEO of Topaz Capital Group, a multifamily private equity real estate firm.
