- Family offices are exploiting the current price and the surplus of available commercial properties to get their foothold inside what many would consider an iconic asset class.
- Families and family offices are not restricted by strict contractual requirements. They can be more flexible, adjust their financial commitments by paying higher or lower amounts of money, and be more strategic to generate a return on investment.
- The shift of investor interest will impact the future of work as dynamics change.
New York City is experiencing the highest levels of vacancy in its commercial real estate market since prior to the pandemic. Vacancy rates rose at about 13 percent since 2019, which is driven by the work from home shifts that affected finance, professional services, technology, and other industries common in Manhattan and the surrounding boroughs. If you work at a hedge fund and you spend all of your time behind a computer, why do you need to be on the 47th floor of a Midtown high-rise?
As more businesses embrace fully remote operations, the need for large office spaces has diminished, resulting in a destabilization of New York City’s real estate prices. This change in the trading frequency of this asset class has also brought a change in the profiles of investors seeking returns from it.
This shift of investor interest will impact the future of work. Institutional investors have specific fund goals and ROE (return on equity) objectives based on their fund formations. Families and family offices (private wealth management firms established by ultra-high-net-worth families) have more diverse and flexible objectives. This impacts the kinds of tenants, the kinds of lease terms, the types of investments, and the types of development that will become available to businesses of today and tomorrow.
It is no secret that there are a select number of extremely wealthy families that control a large percent of the New York City real estate market. These include the Koch family, the Rothschilds, the Rockefellers, and even Donald Trump (although his position in the New York City real estate market does not match the hyperbole he uses on the political campaign trail. Source).
The cratering of New York City commercial real estate prices has now allowed families of lesser notoriety to trade the asset class. This also means there are less institutional investors as a percentage of the total investors participating in the market.
An example of a less recognized family getting a foot in the city is the acquisition of the former American International Group headquarters in lower Manhattan by an entity co-founded by Carlo Bellini, son of Quebec billionaire Francesco Bellini. Francesco Bellini, a renowned Canadian entrepreneur, is actively involved in the biotechnology sector. According to TheRealDeal, his son Carlo Bellini oversees the family’s real estate investments.
Family offices are exploiting the current price and the surplus of available commercial properties to get their foothold inside what many would consider an iconic asset class. This juxtaposition of two real estate investment profiles creates dynamics for people who purchase New York City real estate and the future of work.
Prior to the pandemic, midtown office spaces held immense value, providing landlords the negotiating power over tenants. However, the dynamics have shifted now, and it became easy to imagine a world where tenants wield higher influence than they did before. They will likely demand terms that cater to their needs, such as lower lease terms and flexible work spaces.
Institutional investors operate based on strict contractual requirements they have with their limited partner (LP) investors. On February 23, Goldman Sachs released their Eyes on the Horizon report, where they surveyed 166 global family offices with at least $500 million in assets. Per the report, 48% of these family offices intend to allocate their assets in the real estate sector this year. Another survey conducted by Citi Private Capital Group showed continued investments in the real estate market (43%) ranked as the second most popular action among family office portfolios. Families and family offices are not restricted by the same requirements. They can be more flexible, adjust their financial commitments by paying higher or lower amounts of money, and be more strategic to generate a return on investment.
New York City has long been an attractive investment opportunity for international families. Indian, Chinese, European, and in some cases even Russian investors choose to buy New York City real estate for various objectives, including the need to safeguard their funds by moving them away from potentially riskier economies. Consider the case of Chinese entrepreneurs and business owners who seek control over the assets that China’s more authoritative government does not always guarantee. Tax shelters, including Delaware, can play a pivotal role in the decision-making of these family offices as they acquire assets that will impact the future of work.