Family Offices Are Diving More Into Commercial Real Estate — With a Twist

A 25-year master lease inked last October by Declaration Partners and Hilltop Real Estate for three SoHo storefronts showcased an evolution in the family office space in commercial real estate.

Under the $50.1 million deal, Declaration, an investment firm that acts on behalf of family offices, and Hilltop now control the retail condo units at 113-121 Prince Street currently leased to three clothing stores through 2051 with an option to extend until 2091. The flexible transaction in a vibrant retail corridor was forged on the heels of Declaration Partners — which was created in 2017 and which is anchored by the family office of Carlyle Group co-founder David M. Rubenstein — raising $303 million for its second real estate fund.

“It was a very unique, bespoke kind of deal that I don’t think a lot of other investors would have been able to do. And that’s what makes family offices so unique, is they have that flexibility,” said Seth Niedermayer, partner at HSF Kramer, who advised Declaration Partners on the long-term deal. “It shows you what family offices are capable of.”

Declaration Partners announced the $303 million raise for its second real estate fund on Oct. 23, five days before the SoHo deal was secured. It raised the funds from other family offices and wealthy individuals with an eye toward targeting transactions in the multifamily and industrial sectors. The raise was a sign of the increased appetite among these offices and individuals for commercial real estate investments.

Todd Rich, co-founder, partner and head of real estate at Declaration Partners, said the firm has always sought to have options built in for either long-term holds through compounding capital with tax deferments or opportunistically selling assets earlier on. Rich said an increasing number of family offices are now seeking similar flexibility with investment decisions.

“Family offices like the option to hold long term and compound if that’s appropriate, but they also like the option to sell early if that’s a better outcome, and so the question is how do you get both of those options?” Rich said. “There’s been some level of innovation in the world of fund constructs for family capital that we and others are trying to pursue in order to meet those demands.”

Rich said Declaration is well positioned to provide family offices with flexible options by providing various capital structures. It does so through a mix of deals involving preferred equity, general partner equity and common equity. He noted that family office capital enables more versatile funding frameworks than traditional institutional capital markets firms, allowing that capital to be an “attractive partner” to certain counterparties. 

An increasing number of family offices are also looking to provide financing themselves. Niedermayer noted that one family office client in New York is eyeing 20 loans this year alone. Niedermayer stressed that adding institutional investors to family offices can arm them with more capital for a variety of deals while also earning revenue from fees, but complications can arise.

“You have to answer to other people, and you have people questioning your performance, and you have to spend time raising money,” Niedermayer said. “Then you need other functions within your family office, too, and you essentially then need investor relations people to go out and do fundraising along with your actual investment team.” 

Jacob Slone, managing director at owner and developer Harbor Group International, said the mindset of many family offices has pivoted in recent years from co-investing in individual deals with other families to aiming for more diversification of assets through funds or other vehicles. This has prompted family offices to seek more seasoned fund managers who can help diversify risk exposure, Slone said.

“A lot of them have pivoted toward experienced groups, and then they’ve also very much started to think a lot about diversification, knowing that you can have a property that may not do well. But, if you’re invested in a portfolio of properties or in a fund, then overall you will, assuming you pick the right manager, likely do well over time,” Slone said. “For the largest family offices, they may see it as an opportunity to become an anchor investor sometimes in fund vehicles or other areas alongside the largest institutions.”

Signs of family offices institutionalizing are also evident in South Florida. There, developers often partner with family offices to raise additional capital or execute syndication deals with multiple investors, said Michael Martirena, a luxury real estate broker at Compass in Miami.

Martirena said as South Florida condo projects get bigger, family office involvement has increased to help bring the developments across the finish line. He noted it is very different from when family offices used to operate on a far quieter and more independent basis.

“Now they act far more like a boutique equity firm,” said Martirena, who has done about 10 to 15 percent of his deals through family offices. “There has been that shift where they’re going outside the rope.”

A number of family offices have been tackling larger transactions in South Florida recently and seeking more outside capital given their small operations, Martirena added. He noted that a couple of family offices approached him about acquiring land in the sought-after areas of Brickell and Fisher Island, underscoring their need to go outside their traditional small network of investors.

The institutionalization of family offices is expected to only rise in South Florida, according to Martirena, with more competition as more look to relocate to the region from California due to better tax conditions. Martirena said there was an initial surge of California family offices moving to Florida during the height of the COVID-19 pandemic, and the trend has picked up steam in the last two years as Golden State lawmakers weigh a proposed 5 percent tax on billionaires.

“I was dealing with a family office from San Francisco recently, and they’re moving their whole company over here for tax purposes,” Martirena said. “We’re seeing that over and over and over again.” 

As family offices add partners, the time period for closing deals also gets extended, according to Lisa Simonsen, a broker at brokerage Brown Harris Stevens in New York.

Simonsen noted that a recent nine-figure transaction she closed with a family office partnership for a condo building took around six months to execute, compared to around three weeks when no partners were involved. 

“When there is more than one partnership it’s great, but it can become a little bit more lengthy, because every decision can turn into a mini negotiation,” Simonsen said. “The more partners behind the buyer, the more gates you have to hit before closing.”

Patrick Southern, an agent for brokerage Serhant, said he began to notice a shift in family office dynamics around a decade ago when multifamily rents began to surge coming off the recovery from the Global Financial Crisis, with new apartment towers rising throughout New Jersey in particular. Southern said opportunities to invest in rental housing coupled with the creation in 2017 of new federally designated opportunity zones offering tax incentives prompted family offices to often aim for bigger properties with more options at their disposal.

Southern stressed that when banks stepped more to the lending sidelines in 2022 once interest rates began to soar, it only accelerated the change in family offices to more private equity-type structures. 

“For lot of these family offices and real estate investors in general, deals have to continue, as not many people have the luxury of just sitting around until the world is perfect for them,” Southern said. “So they’ve got to figure out what lane they navigate in any environment. With the uncertainty with banks, and rates and construction costs being so high, and everything else, going into these PE-type structure deals, I think, they’re just easier from a risk standpoint.” 

The family offices that are winning the day in the current market environment, according to Southern, are the entities that treat their operations more like a business with stepped-up hiring. He said hiring experienced chief operating officers and chief revenue officers is crucial for family offices that extend their reach to multiple parties, in order to adequately keep up with reporting as compliance requirements increase. 

An upward trajectory of family offices beyond their longtime independent base is expected to further take flight this year given the steady rise of such capital. More than two-thirds of family offices globally, after all, were launched in the last 25 years, according to Declaration’s Rich. While family capital ventures more into the private markets, Rich stressed that a customized approach will still prove to be a more advantageous long-term strategy. 

“We do believe there is a difference between investing family capital alongside institutional or retail capital and investing family capital in a tailored way which is specifically designed for the benefits of those families,” Rich said. “We think it manifests in the type of partnerships that you’re able to create with the investors, but also in the types of deals that you’re able to find and the partnerships you’re able to create.”

Andrew Coen can be reached at acoen@commercialobserver.com.