Family Offices Stock Up on Single-Tenant Properties

Jonathan W. Hipp  Photo courtesy of Calkain Cos.

I don’t like fear mongering or over dramatization. But I’m hearing an increasingly loud chorus of otherwise knowledgeable people talking about a recession in 2020.  Part of the fear comes from the simple fact that the current upcycle has had a record-breaking run—as if cycles came with freshness dates. 

I’m not throwing caution to the wind here or advocating we live simply for today. Indeed, there are plenty of storm advisories in the national forecast, brewing from inside the Beltway and spreading globally, such as trade wars that could conceivably derail the good times. So, yes, cautious optimism is the Phrase of the Day, but with a good emphasis on each of those words, please.  

For there is still plenty of room for optimism and, I would say, especially for those looking to place capital in the net lease sector. Calkain Q3 Cap Rate report shows the consistency of the cap rate market. 

Single tenant net lease properties are attracting capital, with a growing number of investors diversifying their portfolios from what we might call their “standard” product types—be it multifamily or multi-tenant office. In fact, we’re also seeing an uptick in private family participation in real estate as a whole, as a newly released report from UBS and Camden Wealth Research reveals. 

 “Following a positive performance reported last year,” the report states, “real estate gained the greatest traction this year, with allocations rising 2.1 percentage points to total 17 percent of the average portfolio. These figures, once again, cement it as the third largest asset class family offices invest in.”

More Direct Buys

They’re also making those deals on more of a direct basis, shedding their hedge funds as fees apparently outpace performance, according to the report:

“For the fifth year in a row, allocations to hedge funds dropped, this last year falling 0.7 percentage points to 4.5 percent of the average family office portfolio. Family offices have doubts about hedge funds’ ability to protect wealth during economic downturns, and they dislike what some deem to be relatively high fees when compared to performance. In interviews, family offices reiterated this sentiment.” 

This family-money trend to me is a tip-of-the-iceberg consideration, since in reality, capital from virtually all comers is chasing deals in real estate on the macro level and in the net lease space in particular.

As if that weren’t enough, “97 percent of real estate investors plan to increase their capital allocation to real estate in the next 18 months,” writes Jussi Askola on Seeking Alpha.com. “Real estate remains one of the last asset classes with attractive total return and income-generation potential.”

It’s the nature of commercial real estate investors to constantly have their guard up—ready to move in order to capitalize on the next trend. It’s no different late-cycle than it is at any other time in this roller-coaster market. Cautious optimism, after all, isn’t a rule only for downturns. 

To quote FDR, the only thing we have to fear is fear itself. So just relax and go about the business of your business.