As is the case with so many commercial real estate investors, family offices are carefully monitoring the direction of interest rates and other economic trends. But any uncertainty they may feel about where those trends are heading isn’t diluting their “strong interest” in real estate, says Kristi Kuechler.
Kuechler serves as managing director of the investor market at Chicago-based Family Office Exchange LLC (FOX), a peer-to-peer network for ultra-wealthy families and their family offices. More than 70 percent of FOX’s members invest directly in real estate. Therefore, Kuechler and her FOX colleagues have an up-close understanding of how family offices are looking at real estate investing in 2019.
While some family offices may be drifting away from shaky sectors like retail, they generally remain committed to commercial real estate as a whole, Kuechler says. In fact, she notes, many family offices continue to sink their money into a favored asset class—multifamily.
In a Q&A with NREI, Kuechler discusses why multifamily remains attractive to family offices, how geography affects their investment decisions, how family offices are approaching Opportunity Zones and what tops their list of investment concerns.
This Q&A has been edited for length, style and clarity.
NREI: What are you seeing in terms of where family offices are wanting to invest in commercial real estate this year?
Kristi Kuechler: Our 2018 FOX Direct Investment Survey shows the real estate sector with the most interest was multifamily, followed by senior living, office and industrial. This year, I continue to hear a great deal of interest in multifamily and senior living.
NREI: Why are family offices especially interested in multifamily?
Kristi Kuechler: Multifamily is fairly well-suited for real estate family investors. Multifamily properties are usually in geographic areas that families tend to know fairly well. Families that are part of FOX often own the property management firm; they’re vertically integrated real estate owners. They know the region, they know the economy and employment picture, they know the tenants, they are managing the buildings, and they are willing to take a risk on a smaller project and don’t need to invest in large-scale apartment buildings.
NREI: How does geography affect real estate investments by family offices?
Kristi Kuechler: It depends on whether they’re going to be lead investors or second-seat investors in a property. Within FOX’s membership, 71 percent of families invest directly in real estate. But not all of them are lead investors who own 100 percent of the equity in the property. In a geographic area they know well, they tend to be the lead investor. But for reasons of diversification, they may be interested in being a second-seat investor in regions that they don’t understand as well.
Real estate families like to know their tenants, see their buildings and understand the physical assets. They are unlikely to redirect to an entirely different investment sector that they can’t see, feel or touch. They are unlikely to move away from real estate, but may allocate to different property types if they reassess the risk profile of what they’ve been doing.
NREI: How are family offices feeling about Opportunity Zones?
Kristi Kuechler: There’s discussion of them, but not a ton of actual projects yet. There’s still so much need for clarity around Opportunity Zones. But there’s an appetite for them—waiving capital gains if you hold an asset for 10 years makes a lot of sense if you’re a long-term family investor.
What I’m hearing is that families who own property in what is now designated an Opportunity Zone may be more interested in developing it now. But I am not hearing a lot of real estate families buying properties in Opportunity Zones; they’re just willing to develop properties that they already hold. They’re not looking to jump on the bandwagon to buy property in census tracts that they don’t know well.
NREI: What concerns are you hearing from family offices about the economy and other factors affecting real estate investments?
Kristi Kuechler: There’s a concern about where we are in the real estate cycle. There’s also great consternation about where we are in the economic cycle, particularly for U.S. families. Families are questioning how disruption from e-commerce, workforce automation and co-working may impact real estate investments. Some families feel that real estate has different risks than it feels like it had in the past. There’s a lot that’s happening that might disrupt the traditional risk profile of real estate.
However, I don’t think any families are saying, “We’re out of real estate.” There may be people who pull out of a sector like retail, but I don’t think they’re going to not invest in real estate. Real estate is an income-oriented, appreciating asset, and that makes a lot of sense for family investors.