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Since the worldwide pandemic hit in March of 2020, multifamily investors have been monitoring all types of trends and opinions in order to help determine their investment strategy during COVID. Some experts predicted that multifamily properties would drop in value due to high unemployment and skyrocketing vacancy levels. Others stated that rents would decrease, and income would suffer as millions of tenants lost their jobs.
Fortunately, those negative predictions never materialized. Multifamily property prices held steady, as did occupancy rates. In many areas, rents actually increased rather than declined. In our Atlanta area properties, for example, we saw rent increases of 20% to 30% and higher. One of the trends that some investors followed were those of family offices. There are more than 3,000 family offices around the world, and they have more resources than the average high net worth individual investor; from dedicated investment teams, to access to top-notch data bases, and vast experience in investing in multiple downturns. Learning about how they behave and invest today can be invaluable to investors.
Looking at family offices and the resources and employees they have in place it’s no surprise that many investors follow their investment strategies. After all, they were able to amass an enormous amount of wealth, so they do know what they’re doing when it comes to investing and managing money.
Family Offices: A Closer Look
A family office is basically a wealth management firm that typically manages money and investments for only one wealthy family. Each one generally invests a minimum of $100M across real estate, stocks, angel investments, and others. Their investments are based on the way they allocate the funds for investments, and according to Fintrx 80% of family offices make direct investments. Since 2010 this trend has grown over 200%.
What makes following the investment trends of family offices worthwhile is that they have a lot of resources and teams in place that are able to analyze the different investment opportunities that come their way. Once investment opportunities are vetted, the teams provide advice to the owners of family offices. It’s quite similar to angel investors who like to invest alongside a venture capitalist who also has the resources to vet various angel investment opportunities, as well as high-net-worth individuals who invest alongside an experienced real estate syndicator in order to tap into their resources and expertise.
There’s an old saying that, “If you want to create wealth, learn from those who have done it before and take advice from those who have been successful.” That’s what many passive investors are doing by following the trends of family offices, venture capital firms, and successful real estate syndicators.
Family offices control trillions of dollars in assets and enjoy a unique relationship with the families that they serve. According to Campden Research, family offices control $5.9 trillion in assets, with more than 42% of those family offices located in North America. They have forged very personal relationships with family members over the years that they’ve worked together, and not only understand the family’s succession plans but also understand the family’s dynamics.
Family Offices Diversify Across Industries
According to a report by UBS, the investments of family offices are highly diversified, with over 60% investing in technology, 45% in consumer goods, 44% in business services, 44% in healthcare and biotech, 43% in real estate, 38% in financial services, and 37% in manufacturing. The numbers exceed 100% because the family offices invest in multiple areas.
Family Offices Prefer Multifamily Before and During COVID
With regard to real estate investments, family offices favor multifamily properties due to the cash flow. As one family office referred to multifamily properties, ‘It’s like a cash flow machine.” That’s why multifamily is their number one choice for real estate investments, far greater than office or retail sectors.
Another reason they favor multifamily is that those investments proved they were COVID-resilient during the pandemic.
At the beginning of COVID, from March through May, many family offices were sitting on the sidelines to see what would happen. Now they’re waiting for opportunities. with 45% planning to raise their real estate investment allocation. However, they’re also looking to be more aggressive and are willing to take on increased risk. As an example, they now would consider a property that isn’t 90% occupied, or one with a very high bad debt percentage. Their thinking is that once COVID is managed, the market will become more stable, and with new management in place they can successfully address occupancy rates.
There’s another indication of their willingness to take on increased risk, which is to purchase properties with excessive bad debt. Right now, there are properties coming back on the market with a high amount of bad debt that they would usually not invest in. However, with their willingness to take on a higher level of risk, many family offices are purchasing these properties with the understanding that they will be giving up cash flow in the short term but betting that over time that cash flow will improve.
After interviewing 121 of the largest family offices in the world, UBS adjusted their expectations for lower returns, due to more tenants that are unable to pay rent along with higher vacancy rates. 76% of firms interviewed performed at or above projections. That means that over three-quarters of family offices performed well during what was considered the worst economic times in our country’s history. It shows that family offices have the necessary resources to diversify and manage risk, which is why they’re overperforming. In addition, half of the offices interviewed are planning to increase their investment capital and are willing to raise their risk profile.
Family Offices Focus on Wealth Preservation
56% of family offices are involved in strategic asset allocation, making them a cornerstone of wealth preservation. As you would imagine, preserving generational wealth is key to the clients of family offices, as it took generations to amass their fortunes. It is interesting to note, though, that those who have made fortunes are willing to take on increased risks, especially since statistics show that up to 70% of wealthy families will lose their wealth by the second generation. That shows great confidence in their people and abilities regardless of the economic challenges that the market may present.
Summary
Family offices are wealth management firms that handle the investment and money management for one wealthy family. Each family office typically invests $100M in real estate, stocks, angel investments and other investment areas. Other investors follow the investment trends of family offices because they have the resources and employees with deep expertise and are able to analyze investment opportunities that come along. They also have a track record of success.
Once they vet the investment opportunities, they make recommendations on asset allocations. Family office investments are highly diversified, with 60% investing in technology, 45% in healthcare and 44% in real estate. When it comes to real estate investing, the preference is multifamily due to the cash flow. In addition, multifamily investments proved to be recession resilient during COVID.
45% of family offices are now planning to raise their real estate allocations and are also willing to take on increased risk. That may include properties with higher bad debt as well as properties with higher vacancy rates. They believe that after COVID is controlled, and with the right management team in place those properties will be profitable and generate the cash flow they’re used to.
Most family offices are investing in secondary and tertiary markets, as they are strong real estate markets with population growth, employment growth and rent growth. In addition, these markets also have demonstrated strong cash flow, resiliency during COVID and overall low risk profiles.
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About the Author
Ellie is the founder of Blue Lake Capital, a real estate company specialized in multifamily investing throughout the United States. At Blue Lake Capital, Ellie helps investors grow their wealth and achieve double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
Ellie is the host of REady2Scale , a podcast that highlights honest, insightful, and thought-provoking discussions on the multiple approaches for successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital at www.bluelake-capital.com and learn more about Ellie at www.ellieperlman.com.