-Sanford, VisionWise Capital
While funds own scores of buildings around the country, these people are instead joining others in groups to buy specific buildings in particular places.
By Paul Sullivan Peter Starrett and Sharon Arthofer are wealthy investors who come from different business backgrounds, but both are looking to put more of their money into an asset that has suffered during the pandemic: real estate.
For many investors, that would mean choosing funds that buy scores of buildings around the country. Instead, Mr. Starrett, who ran several retail companies before becoming a private equity executive, and Ms. Arthofer, an entrepreneur, are investing directly in specific buildings in just a few places.
The strategy is riskier putting several million dollars, for instance, into one residential building versus using that same amount to invest in dozens of buildings. If the investment works out, however, it will offer greater returns and tax benefits.
That’s a big if, especially in the pandemic, when certain classes of properties, like offices, stores and restaurants, have been hit particularly hard by vacancies and tenants unable to pay their rent. But people like Mr. Starrett and Ms. Arthofer argue that they have more control when they invest in particular buildings with a group of other individuals.
“There’s no doubt this has really been an eye opener,” Ms. Arthofer, of San Marino, Calif., said. “Brick-and-mortar retail has completely changed.” Or as Mr. Starrett, who lives in Los Angeles, put it: “I had big questions about it in March when I couldn’t do anything. But I’ve been through a few of these downturns in the past, and I’ve learned patience.”
Real estate is likely to remain a favorite of wealthy investors because it can be owned indefinitely, has predictable cash flow and usually appreciates in value. But investors are looking for different types of real estate than they were at the beginning of the year, according to a report released on Monday by Withersworldwide, an international law firm. The firm talked to people who work in property and land development as well as academics, architects and hospitality workers about what the future of real estate might look like.
Before the pandemic, investors wanted to be in cities like New York and London, where retail and residential properties profited because people lived close together. With coronavirus flare-ups in many cities around the world, investors now are looking for the opposite, said Vasi Yiannoulis-Riva, a partner in the real estate group at Withersworldwide.
Commercial property deals in big urban areas have stalled, and she has been working with wealthy individuals buying estates outside cities like New York.
“I’ve done more residential deals in Connecticut in the last few months than in the past couple of years,” Ms. Yiannoulis-Riva said. “We’re seeing a lot more ultra-high-net-worth folks interested in larger properties that have offices and pools. Their belief is even when people return to work, they probably won’t commute five days a week anymore.” Sign Up As a result, she said, some of the savviest and most risk-tolerant investors have been looking at commercial buildings in the suburbs. These buildings could be part of a new model for companies that want employees to return to the office but can’t accommodate them all with social distancing at their headquarters.
Investors are also looking at residential developments that reimagine how business can use their ground floors. Instead of being anchored by restaurants or stores, as they were at the start of the year, these properties may have tenants, like a pharmacy or a doctor’s office, that will remain through future pandemics. Investors are also looking at industrial spaces that can serve as a warehouses for shippers and e-commerce companies.
For people who own retail or office space where the tenants are struggling to pay rent, Ms. Yiannoulis-Riva has blunt advice: Hold on, if you can. “Right now, it’s going to be hard to sell unless you’re selling at a discount or it’s a distressed property with a lender who’s putting pressure on you to unload it at a discount,” she said.
Ms. Arthofer said she had focused on multifamily buildings ever since she helped her mother manage a real estate portfolio that her father had build up in the Washington, D.C., area. Ms. Arthofer and her husband now have 40 percent of their investments in real estate.
“I’m a great believer in multifamily,” Ms. Arthofer said. “People pay their rent. They don’t want to lose their homes. In our strip retail centers, there’s roughly 75 percent who are paying and 25 percent who are not. But in our apartment buildings, 95 percent are paying their rent.” Ms. Arthofer and Mr. Starrett invested through a sponsor, Lion Real Estate Group, which finds the buildings. The group is betting that an emerging trend before the coronavirus the attraction of young people to apartments in cities like Austin, Texas, and Nashville will be a long-term winner.
That strategy has benefited from the uneven spread of the coronavirus, which has left those cities relatively spared, and from the drop in mortgage rates.
“You have to say, ‘I don’t know what is going to happen in three to five years,’” said Jeff Weller, managing principal and co-founder of Lion Real Estate Group. But if you can lock in a 2.5 percent interest rate, he added, this is the lowest your rents are going to be, so you can also say, “My cash flow in Year 6 or 7 could be phenomenal.” Unlike investors in real estate funds, which often look to sell properties by a certain time and even unload their best-performing assets earlier to increase their rates of return, individual investors who buy buildings themselves can choose when or if they want to sell.
In group deals, though, they’re limited partners, so while they receive many of the benefits of owning a property outright, the final say on when it is going to be sold is up to the general partners who brought the investors together.
Mark Holdsworth, the founder and managing partner at Holdsworth Group, a family office, invested heavily in real estate after BlackRock bought the investment firm he co-founded, Tennenbaum Capital Partners, in 2018. His focus has been on apartment buildings, and now real estate accounts for around 30 percent of his family office’s investment portfolio, an amount he said he hoped to increase.
Mr. Holdsworth has often invested through sponsors who pull together other wealthy individuals to buy a building. Some of the properties have been sold sooner than he would have liked.
“Generally, I’ve been fortunate in that sponsors have gotten good premiums on the ones they’ve sold,” Mr. Holdsworth said. “I’m always sorry to see the cash flow go. But I can put that money into another 1031 exchange.” That number refers to a section in the Internal Revenue Code that is the basis for most commercial real estate transactions. Section 1031 allows sellers of a property to avoid paying tax on the gains by buying a new property within a set amount of time. Real estate investors have used that section to build wealth for decades. But it could come to an abrupt end. Joseph R. Biden Jr. has vowed to end the preferential tax treatment if elected president.
And that has added urgency in an uncertain time. “If you’re going to do it,” Ms. Yiannoulis-Riva said, “get it done.”