The Super Rich and Family Offices Are Changing Real Estate Capital Markets
Their bigger presence remains a fairly recent phenomenon, and it may not last
By Brian Pascus July 4, 2024 9:00 am
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“Let me tell you about the very rich,” wrote F. Scott Fitzgerald in his 1926 short story The Rich Boy. “They are different from you and me.”
Indeed — they are buying real estate with an abandon that a lot of seasoned owners and operators have not seen in quite some time.
Composed largely of high-net-worth individuals and private family offices — typically boasting fortunes of $150 million (on the low end) and $150 billion or so (on the highest of the high end) — this class of the rich, very rich and super rich has expanded its membership over the last 20 years and has now emerged as a new league of shadow players in the debt and equity markets of commercial real estate.
“Family offices have been around forever, it’s nothing new, but I think we’re just noticing them more as institutional capital has dropped off in terms of buying assets,” said Kevin Aussef, president of investment properties at CBRE (CBRE). “Family offices have always been part of our bidding pools, but now they’re the lead singer because they’re looking at real estate as a long-term investor, and we’re seeing them show up and win those bids.”
Over the last 18 months, those bids and buyers have come from wealthy individuals, investor syndicates, and super rich families looking to pounce on the widespread CRE distress.
RXR and Blackstone sold a 40-story office tower at 1330 Avenue of the Americas to an investor consortium led by Josh Rahmani and Ebi Khalili for $320 million in November 2022; Canadian billionaire Carlo Bellini bought 175 Water Street outright for $252 million that same year; and, just last month, brothers Cyrus and Darius Sakhai, heads of the family office Sovereign Partners, bought 780 Third Avenue from Nuveen Real Estate for $178 million.
“We’re definitely seeing them as the most active buyers in individual assets outright,” said Zach Redding, managing director of Colliers (CIGI) Capital Markets, who added that many of the wealthiest family offices have “highly confidential” relationships with national banks. “What I can say is of the nearly half-billion worth of real estate deals we’re executing on, every one of them is being bought and bid on by high-net-worth individuals, and very few institutions are in the picture.”
While ultra-wealthy families have always been part of American history — obviously, there’s a reason Rockefeller, Vanderbilt, Carnegie and Walton remain household names — recent macroeconomic forces have vastly expanded the number of billionaires in the U.S. and around the world. JLL Capital Markets reported that the aggregate wealth of billionaires reached $11.9 trillion globally in 2023, an increase of 190 percent since 2008.
Fueled by near 0 percent interest rates that reigned for 14 years from 2008 to 2022, and supercharged by the federal Bush tax cuts of 2001 and 2003 (which were maintained by the Obama administration) and the Trump tax cuts of 2017 (which also slashed the capital gains tax and lowered the income tax hit taken by the richest 1 percent of earners), America has seen its share of billionaires actually grow in recent years: The collective net worth of America’s 748 billionaires reached $5 trillion in September 2023, an increase of $2.2 trillion, or 77 percent, since the Trump-GOP tax law went into effect in 2018.
The inequality generated by the COVID-19 pandemic only added to the disparity. By mid-2022, 573 people became new billionaires during the pandemic, at the rate of one every 30 hours, according to Oxfam International, a nonprofit.
And this rise in super wealth has had a direct impact on commercial real estate capital markets, with wealthy individuals and families now going head to head with the largest private institutions — Blackrock, KKR, Blackstone, Apollo — when it comes to debt and equity financings.
“The concept of ultra-high-net-worth family offices has been around for a long time, but what’s changed is their approach to investing in real estate. In the last decade they’ve structured their businesses to feel very much like an institution,” explained Nicco Lupo, director of capital markets at JLL’s New York office. “They have deep teams with expertise on private credit, on development, and on cash-flowing assets, and they operate the business very similar to how an institution would.”
One source, who requested anonymity, noted that Oracle CEO Larry Ellison (estimated net worth: $140 billion) has a family office that invests in real estate on his behalf. Another noted that Dell Technologies CEO Michael Dell (estimated net worth: $105 billion) has formed DFO Management to invest the family capital on his behalf, along with MSD Capital to make loans.
“It’s separate from running his business and it’s being managed by an institution for him because he doesn’t have time to do that,” said the source. “So you have sort of this elite segment of the market that is in the investment management business, whether that’s real estate investments, securities or bonds.”
Rather than focus on 21st-century tax cuts as the culprit for this explosion in unlimited wealth, Bob Knakal, chairman and CEO of Manhattan-based BK Real Estate Advisors, pointed to recent economic history as the reason for the sudden involvement of family offices in CRE. He noted that family offices led the investment and financing rush coming out of the 1980s savings and loan crisis, and did the same following the post-9/11 recession in 2002 and 2003, and the post-Global Financial Crisis downturn of 2009 through 2012.
“Every time the market is bottoming out, it would appear to be the most opportune time to buy, and the buying wave is always started by high-net-worth individuals and families,” said Knakal. “What we’re seeing today is that the investment wave is, yet again, being led by high-net-worth families.”
Super private equity
With so much money, so little taxes and so much CRE distress, it shouldn’t be surprising that the wealthiest of the wealthy have numerous avenues where they can park their capital.
First, they have the option of purchasing distressed assets outright. This goes far beyond simply placing debt or equity into a capital stack with the aim of taking control over heavily leveraged investment partners, and it exceeds the traditional method of paying fees to private equity firms to invest capital on one’s behalf.
Today, the super rich are buying buildings for themselves — partners and private equity institutions be damned.
“They’ve been buying a lot of assets in New York City and they get attractive financing based on how much money they have with the bank,” explained David Perlman, managing director of originations at Thorofare Capital. “[Family offices] have a lot of options, they can pick and choose where they want to go — everyone wants distressed opportunities and they’re looking for those.”
Knakal said that family offices tend to shy away from rent-regulated apartment buildings, but they will buy free-market apartments and are currently looking at offices, hotels, medical campuses, retail and unregulated apartment portfolios.
“They want to buy outright,” said Knakal. “Those people are not fiduciaries to anyone but their family members, and they can take those risks.”
But Knakal emphasized that one-off purchases are far from the only moves the super rich are making in current commercial real estate capital markets. The ultra wealthy are creating an entirely new corner of the market by deploying huge amounts of preferred equity into capital stacks to satisfy the cash-in refinancing component of just about every refinancing deal out there.
“I’ve seen that a growing number of private equity firms, family offices or individuals with money are looking more and more closely at equity, and that’s because it’s an almost perfect storm of demand drivers,” said Jay Neveloff, chair of the real estate practice at Kramer Levin.
Citing better underwriting practices following a long-desired interest rate pause, the pressures from lenders that can no longer kick the proverbial can down the road, and the collective fears of equity partners who just want to exit distressed deals with some semblance of their money (and dignity) left, Neveloff listed why equity from the super wealthy is now the rescue capital of choice for desperate lenders and underwater sponsors.
“The preferred equity deals are happening more and more now, there’s more of a need for it,” explained Neveloff. “The preferred equity investors are saying ‘Enough, I want my money, I don’t want to take control, get me out of the deal,’ and the people with the equity are saying ‘I just want a hope ticket because values will eventually go back up.’ ”
Neveloff stressed that many of these preferred equity rescues won’t show up in reports or filings, because lenders don’t want to reveal they’re getting rid of a loan at a discount, while sponsors don’t want to admit they’re losing their lucrative place in the capital stack.
“They may be going to a few people they know, or they’re going to a broker and saying, ‘I only want you to bring this to your five best counterparties — and they can be high-net-worth or private equity funds,’ ” he said. “It’s anyone who has capital who can deploy capital quickly and make a decision quickly.”
Knakal laughed as he cited why high-net-worth individuals are preying on preferred equity positions amid the refinancing crunch. First, preferred equity returns end up multiplying the initial investment; second, those investors sometimes find themselves acquiring distressed properties at a decent cost basis; and, third, compared to the tapped-out common equity partners, the new money can often muscle its way into a pretty good bargain and extract enormous concessions from its preferred equity position.
“When you’re dealing with someone who doesn’t have any choice, you generally can make a pretty good deal,” said Knakal.
Daniel Berman, partner at Kramer Levin, described a recent data center development he worked on, in which a sponsor has both control of the land and the local expertise, but doesn’t have the funding to finish the venture due to the high cost of paying utility firms for energy and building the infrastructure. So to make his data center development a reality, the sponsor has had to grant his equity partners a considerable say over the construction.
“The equity is to me really a luxury at this point,” said Berman. “They’re having to put in money which may not be a lot at the outset, at least relative to the value of the land, but they’re getting a lot of control rights over the venture, and nothing can be done without their approval in terms of effectuating the plan.”
CBRE’s Aussef said this type of rescue capital from high-net-worth preferred equity investors is a significant change, as five years ago there was still plenty of liquidity in the market, interest rates were low, the nation didn’t have thousands of office buildings that were worth less than the debt used to finance them. But now market conditions are correcting value across the board.
“The returns are much better today for that kind of rescue capital than there were five years ago,” said Aussef. “If you have assets underwater, there’s a demand and need for this kind of rescue capital on the debt or equity side.”
The richest lender
If you thought the super rich merely played in the equity pool, then you better remember that nowhere else in capital markets is more power found than in the world of debt and the control exercised by a lender over their borrower.
“What we are seeing now is a few ultra-high-net-worth families investing more into direct lending,” said Ran Eliasaf, founder and managing partner of Northwind Group, a CRE lender. “They recognize returns are attractive, they have some deal flow, and sometimes they partner with another firm — but we’re seeing a lot of private capital like that emerge right now.”
CBRE’s Aussef broke down three opportunistic lending methods family offices and high-net-worth individuals are engaging in to take advantage of current market conditions.
First, they are providing debt to distressed assets as a pure-play lender — they have no interest in foreclosure and merely aim to use their personal wealth to finance borrowers. But a twist on this method is sometimes these family office funds provide debt with the intention of foreclosure, as they’re more interested in the underlying real estate than generating a debt yield. And a third method used today by these family offices involves lending money to both achieve a debt yield and foreclosure on the property.
“If they have to foreclose on a property, they aren’t afraid to do so and they have that strategy,” explained Aussef. “The most active of those three buckets is the hybrid where they’re willing to do both.”
There’s still a fourth realm in which the richest individual players in the world are throwing their weight around: Rather than being lenders, or even purchasing assets outright, many high-net-worth families are now purchasing the loans secured by properties.
For instance, George Soros’s family office foreclosed last year on a delinquent loan secured by an office building at 224 West 57th Street. Soros’s family office had acquired the loan from Deutsche Bank and Aareal Bank, according to The New York Times.
Richard Byrne is president of Benefit Street Partners in New York, a credit-focused asset management company with $80 billion assets under management and more than 75 percent of its assets secured by multifamily properties. Byrne told CO that in recent months he’s been receiving calls from large investors, many of which are family offices that are “highly sensitive” about confidentiality, who are trying to purchase distressed loans off his firm’s book.
“Their request to us is, ‘Look, you’ll need to foreclose on some loans, or do a deed-in-lieu, and we’d like some kind of exclusive agreement with you to purchase those [loans],” said Byrne. “I’m not sure why that’s good for [Benefit Street Partners], as we’d rather have an open market system. However, these kinds of requests imply there’s a pretty heavy appetite for assets.”
Byrne underscored the fact that the fundamentals of most distressed multifamily assets are fine, but the underlying capital structure has been turned upside down due to interest rate and cap rate metrics being reversed from the assumptions made at origination.
Crafty investors from high-net-worth families are now pouncing on distressed loans for the obvious reason that if the loan gets paid off, they get their money back with interest; and if it defaults, they get to take control of an attractive multifamily property at a low basis.
“We’ve been getting five to 10 bids over 30 days every time we put a property up for sale, and those bidder groups will inevitably include a big family office or a big individual investor,” said Byrne. “Guys who are investors like that are always looking for an edge and that’s how they’re finding us. They’re finding us because they want to buy stuff in advance.”
A new world of capital
The emergence of high-net-worth capital is not merely an American phenomenon. Of the dozen capital markets experts CO spoke to, almost everyone agreed that many of the family offices and high-net-worth individuals now deploying their fortunes into commercial real estate are coming from the same group of countries: China, Japan, South Korea, Taiwan, Germany and England, and also from the Middle East and South America.
“They are just as sophisticated as debt funds or private equity groups, but where they are differentiated is by the speed of their decision making,” explained Colliers’ Redding. “Going through [a financing] with a debt fund or a group with an investment committee, there’s a detailed process they go through because they are using other people’s money. But with these people, if they like something and need to come up with $10 million or more, they’ll make the decision very quickly.”
Speed is only one of the differences between family offices and the capital raised and deployed by private equity and large institutional investors.
Neveloff spoke to the different motivations influencing high-net-worth capital from private equity and institutional capital. He cited the limited duration of funds and the fact that redemption requests are sometimes not honored by the largest institutions. However, he added that private equity funds have advantages over family offices — they can usually deploy more cash on transactions, they are willing to take different positions in the capital stack, and they have the ability to roll over investments into different funds.
“But when I speak to clients who have equity and who want deals, they’re concerned with investors coming in for a seven- or eight- or nine-year term and who then they want to monetize,” said Neveloff. “A lot of generational families really feel more comfortable with someone they can invest with and be with for a long term.”
Neveloff’s colleague Berman noted that individual family offices have the flexibility to do their own deals and retain more control in a transaction, especially as they hire in-house talent to effectuate financings. They function like institutions, but without the same restrictions from return thresholds and time frames to recycle capital because they’re not locked in a fund construct.
“And they don’t want to be paying fees,” said Berman. “They have in-house real estate teams that are direct investors in deals, and they go out and they find deals.”
But as institutional capital flows have declined amid the distress, there’s been a lack of core and core-plus investments, in turn opening the floodgates for value-add and opportunistic capital to enter the equation and capture risk-adjusted returns through coffers of high-net-worth families.
“They’ve always been there in some regard, but they realized institutional capital today is kind of frozen, especially limited partner equity, and common equity for deals is almost entirely frozen,” said Redding. “So they’ve found an opportunity to assure themselves of returns on a basis they otherwise wouldn’t get.”
Unlike private equity, a high-net-worth investor is mainly focused on basis, and isn’t as concerned about internal rate of return (as private equity firms are, due to their designated hold period). For the super rich, knowing they can buy an asset at a price it traded at 20-plus years ago is the main attraction of any deal.
But so long as price per square foot appears attractive, liquidity remains constricted, and taxes keep getting cut, the few super wealthy predators will continue to feed on CRE capital markets.
Brian Pascus can be reached at bpascus@commercialobserver.com
