I hear from many people who are wondering what family offices are doing in response to the Covid-19 crisis when it comes to real estate investing. After speaking with many family offices that I know, it appears that their position and willingness to invest in some of the upcoming distressed opportunities is different than it was during the Great Recession. During the recession, families were, for the most part, waiting on the sidelines until things started to turn around and become better. They weren’t necessarily investing until they saw things begin to improve. This time, however, it’s different.
The memory of the recession is still lingering today, and so are the missed opportunities. This time, families have been waiting to invest in the opportunities that will become available in real estate. They have been sitting on monies waiting for that chance. It didn’t start out that way, however, when the pandemic first hit. The first area that most families focused on was their equity portfolios, taking a look at their allocation and, once again, identifying opportunities where they could benefit from the market turmoil. Real estate investments were put on hold until family offices were comfortable with their securities investments. After that, families turned and began to explore what opportunities may become available due to the pandemic and the impact it had on assets, with the top focuses seeming to be on hospitality, followed by retail. There are still families looking for multifamily distress.
I predict that the impact on multifamily properties will surface in about nine months, after the other property types, so time will tell us how much of an opportunity there really is. What I do believe will come out of the pandemic-induced crisis will be additional investments in 2021 into opportunity zones. In 2019, many families held off on investing in opportunity zones, likely because the guidelines were not complete. So there was still a need for more understanding of what was needed to invest in these areas. At the beginning of this year, the rules for opportunity zones were complete, allowing family offices to feel comfortable investing.
The result appears to be family offices increasing their allocations from 2019 to 2020, according to a study my team at Family Office Real Estate completed this year. Our findings were that in 2019, 12% of families were looking to invest in the opportunity zones, compared to 24% in 2020. Overall, “opportunity zone investors have been some of the most active players in the real estate market” this spring, according to experts, and I believe we’re going to see a significant influx into opportunity zones going into 2021 from family offices in particular. There will be capital gains from various transactions in the stock market, and family offices will want to minimize their tax impact, which is what opportunity zones can help with.
The question that does come up is how these investments in opportunity zones will compare to the distress that the pandemic has created in similar property types. The majority of investments in these zones are development projects, but when the cost to develop is higher than the cost to purchase as an investor, you’re going to want to maximize those distressed opportunity investments.
Regardless of the route that family offices take to invest in real estate, whether it be through opportunity zones or into distress, family offices are positioned and, unlike during the recession, ready to take advantage of new opportunities that have been created in 2020.