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How HNW Investors Can Compete with Deep-Pocketed Foreign and Institutional Players

Many HNW investors and family offices are hunting for assets in secondary and tertiary markets, rather than in super-competitive “gateway” cities.

As foreign and institutional investors jockey for U.S. commercial real estate assets, experts offer this guidance to high-net-worth (HNW) investors and family offices that might be feeling a bit like bystanders: be a contrarian.

Taking that advice to heart, many HNW investors and family offices are hunting for assets in secondary and tertiary markets, rather than in super-competitive “gateway” cities.

That’s particularly true for multifamily properties. Since foreign and institutional investors are chasing after any multifamily asset “with good credit and that’s bright and shiny,” New Jersey-based real estate financier Billy Procida advises HNW investors and family offices to pursue “smaller scratch-and-dent deals” below $10 million that will require some TLC—in other words, value-add properties.

Kingbird Properties, a newly formed real estate investment vehicle for HNW investors and family offices, has adopted that sort of approach. In the U.S., the company is focusing on value-add multifamily assets in less-glitzy markets like Indianapolis; Kansas City, Mo.; and Columbus, Ohio. In doing so, Kingbird is gladly ceding ground to foreign and institutional investors that are salivating over trophy properties.

For a number of asset classes and geographic locations, that strategy seems to be a shrewd way to prevent clashing with foreign and institutional investors.

In the industrial sector alone, foreign investors—spurred in large part by geopolitical instability and the strong U.S. dollar—have poured nearly $61 billion into the U.S. market since 2010, according to a recent report from commercial real estate services provider CBRE. Regions that witnessed much of that activity include Los Angeles and San Francisco, both of which are gateway markets.

In the case of foreign investors, at least, they might be wising up to the notion of investing in non-gateway markets, though.

Results of a survey of real estate professionals released in September by law firm DLA Piper suggest that over the next year, yields in non-gateway markets will be higher than risk-adjusted global yields, whereas yields in gateway markets will soften, encouraging non-gateway investments by foreign and institutional players.

Still, foreign investors remain “reluctant to go too far afield,” says John Sullivan, chair of the U.S. real estate practice at DLA Piper. He regularly represents foreign and institutional investors.

No matter the location, class-A and net lease properties have been especially prone to spikes in prices and a compression of returns, prompted mainly by a flood of foreign investment, according to Procida.

“International investors that are deep-pocketed have a longer view on investments, are driving prices up and will continue to do,” Procida says.

As for institutional investors, the race to buy big portfolios and large developments has intensified as these investors hunt for yields in the prolonged low interest environment while also trying to hedge against inflation, says Danny Mulcahy, director of equity at Denver-based commercial real estate company Northstar Commercial Partners. Northstar has nearly $1 billion in assets under management.

In light of those aggressive moves by foreign and institutional investors, HNW investors and family offices are being pressed to bid on assets in non-gateway markets like Denver; Nashville, Tenn.; Charlotte, N.C. and Portland, Ore. There, HNW investors and family offices can zero in on properties priced lower (and offering less liquidity) than what entices foreign and institutional investors, but higher than what many local investors can afford, Mulcahy says.

When it comes to vying for assets, HNW investors and family offices in the U.S. typically wield the advantage of familiarity over foreign investors. By and large, HNW investors and family offices have a better grasp of local markets—most notably non-gateway markets—while foreign investors tend to favor U.S. assets that are in their comfort zone, namely multifamily properties and hotels in top-tier cities, according to Mulcahy.

As such, office, retail and industrial assets might be more compelling to HNW investors and family offices, although the CBRE report does emphasize the industrial sector’s allure for foreign investors. For his part, Sullivan cites sectors including data centers and student housing as ones that could benefit HNW investors and family offices, but even those sectors can be susceptible to fierce bidding wars among various types of investors.

Considering the current business cycle, Mulcahy recommends that domestic HNW investors and family offices concentrate on value-add and core-plus assets.

Sullivan concurs. HNW investors and family offices might be willing to assume more risk than their foreign and institutional counterparts are, enabling them to purchase, for instance, a rundown shopping center in Orlando, Fla. and devise a blueprint for redeveloping it, he says. An intricate plan like that is hard for a lot of foreign and institutional investors to carry out.

No matter the property type, domestic HNW investors and family offices often face fewer obstacles—and, therefore, gain more flexibility—in executing deals than foreign and institutional investors do, Sullivan says.

For instance, a HNW investor or family office could find it easier to cobble together an industrial portfolio through a series of small one-off deals than a foreign or institutional investor could. Then, as Sullivan points out, the HNW or family office owner could turn around and sell the industrial portfolio to an eager foreign or institutional buyer.

In gauging the overall commercial real estate market, HNW investors and family offices should take a “glass is half full” view, Sullivan says.

“I think there’s still plenty of opportunity,” he notes. “Remember that all real estate is inherently local, so look for opportunities in geographic locations and product types that are not the ones most in favor by the big private equity funds and the foreign investors.”

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