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Chief investment officers told CNBC that rising interest rates have caused family offices to become more selective about their real estate investments, with many focusing on properties with high discount rates and assets with strong pricing power.
Rob Haugen of Michels Family Office said the firm is being cautious about investing in the asset class because of the uncertainty in interest rates. Mr. Haugen oversees private capital investments, mergers and acquisitions for family offices and is chief investment officer of the spinout company River 1 Asset Management.
“Honestly, until we have a strong belief that interest rates are going to go down again, it’s hard to want to do anything other than really special projects,” he said.
Haugen said he typically targets potential opportunities with cost-to-revenue ratios in the high single digits or low double digits. This can be done by purchasing office buildings at deep discounts with known tenants occupying a large portion of the property, he said. Another opportunity avenue is big box stores, he said. Haugen said the family office worked with a consortium of investors to buy Kohl’s near Milwaukee about a year and a half ago.
Joel Hauck, chief investment officer at HB Wealth, said there was growing interest from large family offices in real estate and broader properties such as industrial warehouses, farmland and woodland. Certain types of real estate and real assets offer protection against inflation, which is a top concern for many family offices, he said.
According to Houck, these assets are tax efficient, allowing investors to earn more. For example, a depreciation shield could be used to defer distribution payments until the asset is actually sold, he said.
However, whether real estate can hedge against inflation depends on its pricing power and structure.
“In the case of real estate, inflation protection comes from the ability of the underlying property management company to reset rents,” Hock said. “Not all rents reset at the same rate for different subclasses of assets, such as multifamily, industrial, and retail.”
He said both industrial properties and residential properties can offer periodic rent increases. Both asset classes can benefit from supply constraints, Hoch added.
He noted that rising interest rates could create opportunities to buy assets at a discount, but investors should also keep an eye on how much debt a fund uses. HB Wealth typically steers clients away from funds with leverage greater than 65%, whether at the asset level or the fund level.
And while family investors are interested in investing in real estate and hard assets around data centers, many are wary of the commitment required. Haugen is wary of entering into a 10- to 15-year lockup with high interest rates.
Mike Silverman, Cresset’s chief investment officer, said clients frequently ask about data centers, but the wealth advisory firm doesn’t pursue such opportunities because of the risks.
“I tend to think of data centers more as a technology investment than a real estate investment,” he said. “You’re investing in a 15-year lease with a major company. That sounds very attractive, unless at the end of 15 years, technology changes make the data center worthless. That’s why I’ve become cautious about data centers.”
