Pros and Cons of Being a Family Investment Office

Flores: “Family offices experience rigid competition from foreign-capital buyers that may be investing in commercial real estate for intrinsic reasons or reasons beyond yield and/or cash flow.”

NEWPORT BEACH, CA— In their acquisition criteria and yield thresholds, family offices tend to be as unique as the people involved, CBRE investment sales advisor Arthur Flores tells GlobeSt.com. Flores, based in Newport Beach, CA, recently represented a private buyer in the purchase of a two-tenant retail center in Downey, CA, for $10 million; the center has been newly leased to Warehouse Shoe Sale and PIH Health . We spoke exclusively with Flores about the benefits and challenges of being a family office in commercial real estate investment. GlobeSt.com: What are the pros to being a family investment firm in commercial real estate and the opportunities it affords these companies? Flores: The majority of my sale transactions involve a high-net-worth , private-capital investor or partnership. In such a scenario, it is typical that the investor’s capital source is readily available and fully discretionary, providing an opportunity for an investor (whether that be on the buy or sale side) to be nimbler, opportunistic and aggressive than most institutional-type buyers or sellers. GlobeSt.com: What are the challenges to it? Flores: The biggest challenge that private family offices often face in today’s commercial real estate investment environment is the copious amount of aggressive (both private and institutional ) capital-chasing opportunities. Institutional groups ( private equity , REITs , pension funds and advisors, etc.) have an extremely low cost of capital, coupled with robust purchasing power; providing an opportunity for these groups to make financial sense out of ultra-low returns in comparison to private groups often chasing yield. Also, family offices also experience rigid competition from foreign-capital buyers that may be investing in commercial real estate for intrinsic reasons or reasons beyond yield and/or cash flow. GlobeSt.com: What do family offices look for in the properties in which they’re investing? Flores: Family offices tend to vary significantly in their acquisition criteria and yield thresholds; no two groups are exactly alike. Many family partnerships look for “trophy” assets with long-term, uninterrupted cash flow. On the other side of the spectrum are more opportunistic private investors seeking higher-return/higher-risk opportunities, pursuing value-add product. There are some family offices that look for a hybrid of both. Ultimately, it depends on a litany of factors including return thresholds, alternative investment opportunities, cost of capital and physical location, among others. GlobeSt.com: What else should our readers know about family investment firms? Flores: I advocate that family investment firms will play a considerable role in the future of commercial real estate. In some cases, the amount of capital that some of these family offices control is comparable to some institutions. Historically, private investors or partnerships pursued assets under $20 million. However, the debt market in recent years has made it possible for high-net-worth private investors to “lever up” and acquire larger product type, greater than $20 million and, in some cases, greater than $100 million. So long as the current capital-markets environment stays relatively stable, we can expect private investors to continue to buy and hold intuitional-quality product. With developers leveraging development and redevelopment opportunities across all property types, how can you capitalize on this activity? Join us  at RealShare Orange County on August 16^th for impactful information from the leaders in Orange County CRE. Learn more .