Is the Pandemic a Once-in-a-Generation Opportunity for Family Offices?

home office

It’s estimated that there are 5,300 family offices globally, accounting for about $9 trillion in assets. According to the 2019 USB/Campden Wealth Global Family Office Report, about 17 percent of family office wealth is tied up in direct real estate investment and management, while a third of respondents planned to increase their investments in direct real estate.

The ultra-rich have always invested heavily in property. Two centuries ago, international banker Nathan Meyer Rothschild advised investing one-third of assets in real estate. In times of low returns in most asset classes, real estate continues to generate comparably attractive returns. And now, direct investment is trending (versus investing in shares in a fund or a publicly or privately held company).

What’s driving this move to direct investment? And will family offices also be heeding Rothschild’s other advice to “buy property when there’s blood on the streets”?

Family Offices Focus on Preservation for Future Generations

Family offices are typically concerned with preserving long-term wealth for future generations. Many of these offices are created with the proceeds of entrepreneurial businesses, as founders often wish to separate and protect family assets from their business activities, which may be subject to disruption. Family offices also facilitate generational changes and allow for professional, dedicated management of accumulated wealth.

But professional management doesn’t necessarily mean outsourced management. Family offices are becoming more sophisticated and bringing professional management in-house. Plus, they offer reduced fees to clients, given that most have paid the industry-standard 2 percent management and 20 percent performance fees for decades.

Reduced costs aren’t the only incentive for direct investment, however. Family offices’ investment horizons extend beyond those of investment companies, which tend to invest in funds on a five- to six-year timeframe. Research by Bain and Co. found that selling a direct investment vehicle after 24 years yields a return of almost two times that of a short-duration fund. This is due to reduced trading costs, more tax-efficient exit planning, and improved capital deployment.

The Coronavirus Pandemic Offers a Learning Opportunity

Younger generations are playing a more active role than ever in family offices, particularly in philanthropy. Here, they direct family funds to sustainable or impact investment, rather than giving money away (often their parents’ and grandparents’ approach).

Many family offices were slow to invest in real estate during the recession following the 2008 financial crisis and have lived to regret it. The coronavirus pandemic is once again offering the “blood on the streets” scenario that usually comes once a century. Many offices are building up cash to take advantage of distressed sales and diversify their real estate portfolios. Now is an ideal time to involve younger family members in real estate investment strategy decisions.

What Do Investors Need to Consider?

The financial repercussions of the pandemic are only just beginning to show, and the pandemic could potentially be a precursor to an even greater crisis. At this point, what should real estate investment strategies entail?

All things considered, real estate has performed relatively well overall during the pandemic. But individual categories have had vastly different results; for example, hospitality and office space have been hard hit while industrial has performed well. Some experts suggest following a conservative approach, paying attention to how the pandemic, disruption technology, world politics, and climate change have affected fundamentals like:

  • Job opportunities
  • Remote work opportunities
  • Migration patterns
  • Cost of living
  • Quality of life

Investors should introduce and consider a range of “what if” scenarios, looking at reduced rentals and higher vacancies to ensure they’re not overcommitting in the short term.

International Real Estate Investments

Direct real estate investment requires specialized, experienced human resources and access to a deal pipeline. Some family offices enter into real estate “club deals” to combine resources, often creating partnerships or joint ventures for individual projects. This can be a sensible way to lower risk, provided family values and risk profiles match. But even club deals can still mean investments are geographically concentrated in traditional, known locations with limited upside.

Family offices seeking to diversify their real estate portfolios by location should consider local partners. Overseas real estate investments may present above-average returns, but a local expert will provide a context for the investment. They can also advise on location-specific tax and legal requirements. It makes sense for family offices to invest in real estate. Although indirect investment remains an option for passive investors, direct investment offers greater control and flexibility. Involving younger family members early on, collaborating with other family offices, and partnering with local experts can help ensure family fortunes are preserved for generations to come.

Self-Storage – There’s Still Upside if You Know What to Look For

self storage

Self-storage is commonly regarded as recession-proof. It also delivers stable cash flow at reasonable margins. In the choppy waters of a pandemic real estate market, those are attributes that look very attractive.

For investors looking to diversify their commercial real estate (CRE) portfolios, self-storage can add ballast—and if there are opportunities to pick up distressed assets, all the better. However, as an asset class within CRE, self-storage has some unique quirks.

It’s also an industry that’s evolved substantially since arriving on the scene in the 1960s, and it’s still changing. So how has self-storage weathered the pandemic? And what do prospective investors need to know before diving in?

What Is Self-Storage?

Along with hotels and assisted living/independent living facilities for seniors, self-storage is one of a few asset classes that involve operating businesses attached to real estate. As such, it presents opportunities for upside in operational improvements.

Big brand chains like Public Storage, CubeSmart, and StorQuest were wise to this when they entered the market, which had predominantly consisted of mom-and-pop operations. These companies streamlined operations, sharpened business practices, and quickly realized the benefits.

Publicly traded self-storage REITs have been among the top-performing sectors of the past decade. Features that contribute to their performance include:

  • No improvement costs associated with turnover; little needs to be done between one tenant leaving and the next moving in.
  • This means there are no works delays between tenants. Units are immediately available for the next tenant.
  • Negligible customer acquisition costs. Rentals are typically on a month-to-month basis, and there are no brokerage fees involved.
  • Staffing requirements are low. Tenants don’t “visit” their stores on a daily or even regular basis.
  • Construction and conversion costs are lower than comparative CRE assets like office space.
  • As a result, maintenance costs are also comparatively low.

The combined effect of the factors above is that the required occupancy levels for self-storage are lower than comparative classes. On average, retail, office, and multifamily units require a 65% occupancy level to service standard debt requirements. The breakeven occupancy level for self-storage is about 45%.

How Is Self-Storage Evolving?

However, the industry continues to evolve rapidly, and investors must exercise caution in applying outdated models. Attractive returns have resulted in sporadic spots of oversupply. As the market has matured, tenants are demanding increased convenience and improved facilities.

Location

Storage follows population. Whereas previously, self-storage would be situated on the outskirts of a city or in industrial areas, it’s now finding its way downtown. At an Apple Self Storage facility in urban Toronto, for example, 70% of the tenants are businesses. Plus, millennials and baby boomers are flocking to city apartments and need conveniently located storage for their surplus gear.

Features and Facilities

These more prestigious locations come with the costly city building and zoning requirements associated with retail spaces. An increasingly competitive market means that customers want storage space that looks attractive inside and out.

Tenants are also increasingly demanding climate and humidity-controlled space for their clothing, documentation, and electronics. There is even a market for specialist storage for art, wine, and boats and cars, which must include sophisticated security.

How Did Self-Storage Fare During the Pandemic?

According to PWC’s Emerging Trends in Real Estate 2021, self-storage entered the pandemic on a solid footing and sustained revenues and collections. The industry was aided by being declared an essential service and thus avoiding closures during lockdowns. Tertiary education institutions closed, and elsewhere, capacity was reduced for social distancing purposes. Many self-storage facilities saw an increase in demand as students returned home and restaurants cleared their spaces.

What Do Investors Need to Know for 2021?

There’s no crystal ball for predicting how a post-pandemic CRE market will play out. But when it comes to self-storage, investors should look out for the following possible trends and opportunities:

Flat or Reduced Revenues: Government stimulus packages were probably partly responsible for sustained revenues in 2020. As the long-term effects of continued unemployment roll out, tenants may not be able to pay their rent.

Increased Demand: Associated with the above, there could be an increased demand for storage as people move, downsize, or relocate due to pandemic-related pressures.

Distressed Sales: Around 80% of self-storage facilities in America are owner-run by individuals or mom-and-pop owners. This profile of owners tends to sell in tough times. There could be a flood of properties on the market.

New Supply Slowed: While storage facilities were allowed to remain open, self-storage construction activities ceased. There may not be sufficient confidence or funding to pick up with the projects again in the coming year.

Opportunities for Conversion: Creative investors could potentially look to distressed sales in other classes like offices and retail for conversion opportunities.

Ultimately, self-storage seems to have clung to its reputation as recession-proof. Investors who know what to look for could do worse than diversify into the market.

Multi-Family Investors Could Find a Market in Baby Boomers

retirement

By 2030, the number of people over 65 years old in the United States will total 72 million. Born between 1946 and 1964, they’ve come to be known as “baby boomers.” As more baby boomers begin to retire, their impact on the housing market is becoming increasingly apparent.

Since 2011, 2 million boomers have retired each year. But last year, that number rose to 3.2 million. The pandemic may have influenced their jobs or sped up their decision to retire. Or it could have been the double-digit surge in home prices seen by 88% of the housing market in the final quarter of 2020.

Baby boomers are increasingly renting urban multi-family units

Baby Boomers ages 65 to 73 sold their homes faster than any other age group in 2020. But where are they going? While baby boomers are primarily homeowners, an increasing number of them are choosing to rent. As a result, multi-family investors may want to consider targeting baby boomers, who could drive demand for apartments.

One trend that has been evolving since 2014 is that the increase in the number of baby boomers in the rental market is approaching that of millennials. For multi-family investors, the growth in baby boomers seeking apartments presents an exciting opportunity.

Baby boomers are increasingly moving downtown into large, amenity-rich apartment buildings at only a slightly lower rate than millennials, who comprise the largest share of micro-unit apartment dwellers.

But older couples, singles, and pied-à-terre users are a substantial secondary segment, according to a study by the Urban Land Institute.

Community and convenience

“Two things are important to them,” says Ron Shuffield, president of EWM Realtors. “I call them the two C’s – community and convenience.”

Amy Schectman, chief executive officer at 2Life Communities in the Boston area, agrees. Isolation is a more serious health danger than obesity and smoking and can double the rate of dementia, she said.

Baby boomers are in better physical condition and will live longer than their parents. They want to pursue more active lives and need to make their money last longer.

A 2019 survey by the architecture firm Perkins Eastman found that 26% of its clients in the senior housing business believe that boomers will be most concerned with living in proximity to an urban location or town center.

Technology and the sharing-economy drive down costs and extend independence

Economist Linda Nazareth predicted in 2015 that baby boomers would drive the growth of the sharing economy. She mentioned cash-strapped retirement as the main reason, but also points to boomers as a generation accustomed to sharing.

Dan Hutson, a senior-housing strategist, agreed. “Transportation-on-demand, dining-on-demand and online learning…all play well in the senior market.” And he pointed out that voice-first technology like Amazon’s Alexa is ideal for older users.

Services offered by apps like Instacart, Uber, and TaskRabbit can help retirees with shopping, lifting, and chores when they cannot manage on their own. And when they need help with day-to-day tasks like dressing and bathing, services like Honor can provide care in hourly increments. Professional care companies usually work on three-hour stints to ensure that travel costs are covered. “It’s about efficient routing, and the right people in the right place at the right time,” says Seth Sternberg, Honor’s co-founder and chief executive.

A study by the MIT Age Lab investigated the cost of living for a healthy, single 85-year-old. Living at home without a mortgage and using sharing-economy services cost $2,967 a month. In contrast, an assisted-living option in the Boston metropolitan area came in at $6,433 a month. That’s a significant savings.

But the sharing economy isn’t just driving costs down. Boomers are active providers in the gig economy. In 2020, women over 60 years of age hosted 43% of the private rooms rented in the U.S.

An opportunity for investors

Multi-family investors who have been targeting millennials may have an untapped market in baby boomers. At one end of the market, micro-units serve as an affordable option to cash-strapped boomers. This is particularly true when units are positioned in convenient urban locations, close to parks, entertainment, medical services, shops, and restaurants. According to the ULI study, micro-units cost more to develop and operate, but have higher occupancy rates and rental-rate premiums. At the other end of the market, retirees can make excellent tenants for upmarket, full-service apartments.

Tips for Attracting the Best Commercial Tenants

business

Commercial landlords have been left with unprecedented vacancies due to the COVID pandemic. If you’re among them, attracting and retaining desirable tenants can be daunting.

The giants have fallen, and the rules of the game have changed. Big anchor tenants may never be the drawcard they once were. And offices could become ghost towns if working from home (WFH) becomes the new normal.

On the other hand, industrial real estate is showing signs of growth. As vaccines begin to roll out, hopes of a return to pre-COVID living are surfacing.

Understanding the long-term effects of the pandemic is crucial for anyone in commercial real estate (CRE). What changes are here to stay, and how do landlords adapt to them?

Why is finding the right tenants so important for CRE?

With revenues slashed, it can be tempting to take on the first tenants that come along. However, for CRE, this can be a terrible idea for the following reasons:

  • Commercial leases are of long duration—typically five to 10 years. Being stuck with a bad tenant for this period can eat into your margins and time.
  • CRE generally requires custom renovations for each new tenant. Contracting with financially unstable tenants could mean you’re left with a vacancy before recovering your costs.

Avoid acting prematurely in desperation. Instead, take time to understand the dynamics at play in your market. If you can provide what desirable tenants are looking for, you will be ahead of the competition.

Tips for Office Space

The future of office space is highly contested. Some employers were quick to scale down and commit to WFH permanently. However, as the pandemic has dragged on, the limitations of remote work have become apparent in many industries. There are also psychosocial issues that arise when people combine their living and working environments.

Survey data from the international design and research firm Gensler indicates that a clear majority of people want to return to the office—meaning office space is here to stay. Gensler proposes four strategies for leasing in a post- COVID market:

1. Match the architectural features of your building directly to your prospective tenant’s needs and values. The conversion of the former James A. Farley Post Office in New York to Facebook’s new offices was contracted mid-pandemic. The leasing team presented the 730,000 square-foot “groundscraper” as a best-in-class creative office hub comparable to Facebook’s West Coast headquarters. The building’s scale allowed for ample natural light and transparency with almost 70,000 square feet of outdoor park space.

2. Configure buildings for multiple tenant scenarios to maintain relevance. Experiment with design layouts that can shift from single-tenant headquarters to multi-tenant formats without excessive investment.

3. Offer sought-after shared amenities. Carefully research the amenities that your desired tenants are seeking—then provide them.

4. Use visual tools to show tenants opportunities they can’t imagine. Tenants need to be attracted back to the office by experiences they can’t replicate at home. Connected campus technologies that allow for seamless digital integration of tenants make for a frictionless work environment.  

Tips for Industrial Property

Industrial real estate has not experienced the slump seen in other CRE during the pandemic. The Deloitte 2021 CRE Outlook Report attributes this to spin-offs from the drop in retail and hospitality trade, as well as the increased reliance on communications technology.

The shifts to e-commerce—which began well before the pandemic and accelerated during it—are likely permanent. Landlords of industrial property can likely rely on stability from tenants offering “last-mile distribution” services and those hosting data centers. It’s wise to invest in features that will attract these desirable tenants.

The longevity of “ghost” or “cloud” kitchens that arose to meet the increased demand for prepared food delivery is not so clear cut. An effective vaccine drive could see people headed back to restaurants within the year. Landlords should be cautious about investments designed solely to attract these new businesses in the food service industry.

Tips for Retail Space

Retail space presents the biggest challenge to landlords post-pandemic, given the e-commerce boom. There is no clear indication whether shoppers will return to brick-and-mortar stores in pre-pandemic numbers.

Even if they do, Dan Villalpando, a partner at Cox, Castle & Nicholson, quoted in GlobeSt.com, points out that current retail lease agreements are often inadequate in the face of pandemic conditions. Most lease agreements fail to make provisions for mandated shutting of stores, social distancing, personal protective equipment, cleaning regimes, or use of common areas for queuing. Landlords need to seek legal assistance and engage with current and prospective tenants on these matters.

Some retail landlords have already converted all or a portion of their property to industrial use, or to mixed use, like click-and-collect centers. Others are considering converting retail space to office space, but this represents a more significant investment. It might be prudent to test demand for office space post-pandemic first.

Perhaps the safest advice for retail landlords is to concentrate on retaining their current tenants—this is almost always good business sense, pandemic or not. Landlords can help current retail tenants stay in business by:

  1. Complying with and exceeding health and safety guidelines. Building trust with shoppers will encourage them to continue supporting your tenants—and enable your tenants to continue to pay their rent.
  • Restructuring rent payments. You might offer abatement or deferral of rent in exchange for a lease extension. Alternatively, you could provide extra value through perks like free client parking.
  • Innovative use of space. Agree on the use of common areas for restaurants to expand in order to meet social distancing requirements.

CRE has been shaken by the events of the last year. However, disruption can offer opportunity. Landlords who pay attention to changing market demands and address them may have an easier time finding great tenants.