Recently I sent a survey out to over 100 family offices, and it made two things obvious to me: The first is that family offices believe a real estate market downturn is coming in the next eight to 12 months, and the second is that family offices want to better understand where we are in the current real estate cycle.
Unlike large real estate private equity firms, which are actually compensated for putting the money that they raise out to the market, family offices have the luxury of having “patient capital” — in other words, capital that they can choose to deploy when they see fit. It is this patience that also allows families to take take a much longer-term perspective in their real estate investments and create generational wealth. Perhaps this is why the majority of family offices look to hold their real estate investments for 10 to 15 or even 15-plus years.
Now, this coincides with insurance companies who take a long-term perspective, but it is the total opposite of a typical private equity real estate fund that may only be held for six or seven years. And why is that? The difference is in the type of capital, which in private equity funds is institutional. An institutional investor is an entity that pools money to purchase securities, real property and other investment assets or originate loans. Institutional investors include banks, REITs, insurance companies, pensions, hedge funds, endowments and mutual funds. These institutions get paid to get money out to the market, and if they don’t, the clock is ticking based upon the preferred return they are supposed to pay to the limited partners or investors. So, it is in an institution’s best interest to buy assets rather than to be patient like family office capital can be.
But because family offices do not have to invest in real estate on a particular timeline, they can afford to invest when they see an opportunity. When a large firm raises a large fund it must invest that money, even though it may not be the best time to do so.
A few months ago I read an article about one of the major private equity real estate players raising something like $2 billion and starting to invest that money. My thought was that that is not necessarily in the investor’s best interest. Why? We are going to be seeing a downturn here in the next nine to 12 months, I believe. I say that because you can go back in the history of the U.S., the U.K. and Australia and see the common movements of the real estate cycle. When the cycle resets, the real estate market will start to expand for the first approximately seven years after a recession, and then you hit a downturn, which lasts typically six to nine months, and then the market starts to take off again, now providing even greater results than the first upturn, and then we hit another recession. That would mean we should be seeing a recession around 2027 or 2028. With the next downturn coming soon, investors are going to be paying more of a premium for anything purchased now than if they waited another 12 months to deploy the money.
Reading that article a few months ago, a question that came to my mind is, “Isn’t there a fiduciary responsibility that these real estate private equity funds have for their investors?” Now don’t get me wrong, the institutions that invested the money need to be taking responsibility for their decisions. However just because you are investing with the big gorilla doesn’t mean that it is the best person to invest with. In fact, I could even make multiple cases against that. Ultimately, family offices need to understand this when considering investing with larger, brand-name institutions, and most importantly, focus on the true advantage they have: patient capital.
Family offices should be patient, do their due diligence and decide on their time frame — not the sponsors.