Real Estate Investment Insights for Single Family Offices
by Tom Higgins
Co-Founder & Managing Partner of Terra Capital
As stewards of wealth, family offices have a unique opportunity to leverage real estate as a pivotal component of their investment strategies. This sector not only promises appreciable returns and wealth preservation but also aligns with broader objectives like legacy building and community impact. Here’s my high-level overview of the landscape:
Common Family Office Models in Real Estate
Family offices come in many shapes and sizes, each bringing a different perspective to real estate investments. Here are the types I most commonly encounter:
Real Estate-Dedicated Family Offices: These families originated their wealth in real estate. They know the industry inside and out and manage extensive property portfolios hands-on. Think of families like those behind the Trammell Crow Company—deeply involved and maintaining control over their investments.
Diversified Family Offices with Real Estate Teams: These families made their money in other sectors but recognized the value of real estate. They’ve incorporated it into their investment strategies by forming dedicated teams. These teams often engage in joint ventures or strategic partnerships, bringing in professional management to ensure effective portfolio diversification.
Passive Real Estate Investment Family Offices: These families prefer to invest through third-party managers or funds, participating in real estate indirectly. This approach lets them benefit from real estate’s stability and potential returns without the complexities of direct management.
Hybrid Real Estate Family Offices: This is probably the most common model among my peers. Many families don’t fit a specific mold. For example, my mother’s business was in residential brokerage, which we sold 23 years ago. Since then, we’ve invested in all the above ways but found the most value in two specific strategies: backing young, ambitious local operators as co-GPs, JV partners, or typical LPs, and making direct investments in sub-institutional multifamily in supply-constrained submarkets in ‘healthy’ markets.
Common & Effective Real Estate Investment Strategies for SFOs
Family offices can consider several strategies to maximize their real estate investments:
Direct Involvement: If you have the expertise, managing real estate assets directly can give you greater control and potentially higher returns. This means being involved in all stages of the investment, from acquisition to management and eventual sale.
Collaborative Ventures: Joint ventures or co-GP investments can spread risk and bring in additional expertise, making larger and more complex projects feasible. From my experience, this is often the simplest and most effective structure—the straightforward JV.
Indirect Investment: Investing through funds or third-party managers reduces operational burdens while still capitalizing on real estate’s advantages. This can be effective for all family offices because it offers access to different asset classes, such as single-family homes, data storage, and light manufacturing. Manager and geographical diversification can also be attractive.
Benefits and Challenges of Real Estate Investment
Advantages:
Simplicity: For families that actively invest, simplicity is invaluable. Many are drawn to real estate for its perceived safety and simplicity. Our experiences as customers (renters, homeowners) inform us about potential rents, expenses, and building or renovating costs, which are relatively straightforward compared to other domains like tech startups or derivatives.
Long-Term Stability: Real estate is known for its resilience, offering a reliable investment that can weather economic fluctuations and provide steady, long-term returns, especially when conservatively leveraged and in locations with favorable government policies.
Flexibility in Investment Criteria: Family offices can tailor their real estate investments to meet specific family goals, whether financial, philanthropic, or legacy-based. Our family, for instance, takes pride in maintaining clean, safe properties. Our investments in WFH or affordable housing provide impact while achieving acceptable returns.
Personalized Strategy: Real estate investments can reflect the family’s interests, such as supporting sustainable development, affordable housing, or revitalizing communities.
Challenges:
Complex Decision-Making: The intergenerational nature of family offices can complicate decision-making, especially when balancing the interests of multiple family members. Factional ownership within families not organized as well-run SFOs can cause tension. Selling a highly leveraged property with credit tenants, low interest rates, and good cash flow might not always be the best decision due to potential capital gain taxes and disposition fees.
Regulatory Compliance: Real estate is heavily regulated, and navigating these regulations requires thorough planning and compliance strategies.
Market Risks: Real estate investments are exposed to market dynamics and risks, which must be carefully managed to avoid significant losses.
Over-leverage: Family offices have differing opinions on what constitutes conservative leverage.
The Dual Nature of Real Estate Liquidity
Non-liquidity in real estate can be both a blessing and a curse for families. On the positive side, the illiquid nature of real estate can encourage the rising generation to engage with family assets rather than making quick, emotional decisions to sell properties that have required significant effort and dedication over the years. Conversely, this lack of liquidity and the active management required can cause tension among family members, especially when one person spends more time managing the assets than others. The inability to quickly sell and move on can exacerbate these tensions.
"Trading Sardines vs. Eating Sardines": Navigating Short-Term Speculation and Long-Term Investment in Real Estate
“Have you ever heard the Parable of the Sardines? Years ago, there was a bubble in the sardine market. Speculators poured in, buying and selling barrels of sardines, driving the price ever upwards. One day, a speculator, having forgotten his lunch, decided to open a barrel of sardines and eat some. They were disgusting, as he loudly complained to his fellows. A particularly grizzled old trader responded: “Of course they’re gross. Those aren't for eating. They're trading sardines.”’ -Moses Kagan
The distinction between "trading sardines" and "eating sardines," a metaphor often used in trading and investment circles, clarifies the difference between speculating for quick profit and investing for intrinsic, long-term value.
In trading, traders buy and sell cans of sardines, treating them purely as commodities for profit. However, when someone eventually opened a can to eat, they found the sardines inedible. This story illustrates the perils of speculative trading, emphasizing the importance of understanding what you’re buying—whether it’s a commodity for trading or a product for consumption. In real estate terms, "trading sardines" refers to buying properties primarily for financial gain through quick resale, while "eating sardines" involves selecting properties for their lasting value and potential to contribute to a long-term investment strategy.
Applying this metaphor to real estate investment has been extraordinarily helpful to me. Many institutional-scale deals focus on "trading sardines"—driven primarily by financial mechanics rather than the enduring value of the property. However, family offices managing generational wealth might find better alignment with "eating sardines." This strategy involves investing in properties for sustained yield, closely aligning with goals such as legacy preservation and community impact. Selecting A+ locations in supply-constrained neighborhoods where long-term value and demand are more predictable offers the stability and appreciation sought by family offices for long-term investment portfolios.
That is not to say we never partake in “trading sardines.” Most real estate platforms need to know both well. Recognizing the right contexts for each investment approach is crucial. By understanding whether they are engaging in trading for quick profits or investing for long-term value, particularly in premium locations with limited supply, we can effectively manage our portfolios to achieve both immediate returns, fees, and sustainable growth.
Conclusion
The real estate market offers a wealth of opportunities for family offices. By understanding the different models and strategies available and tailoring them to your unique family values and goals, you can achieve substantial returns while building a lasting legacy. Real estate isn’t just an investment; done right, it can help shape the framework of both the family and the communities they support.
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The content in the is newsletter was inspired by “How to Work With Family Offices Family” by Brad Hardgreaves and Moses Kagan’s X.