Super-Rich Families Are The New Real Estate Lending Class
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Fiscal caution and tighter regulations following the last recession have made it harder for real estate developers to get capital from traditional lenders this late in the economic cycle. But it is not impossible to find capital if you know the right family.
“It’s a new world in terms of being able to structure deals,” Harbor Group International Chairman and CEO Jordan Slone said Thursday at Bisnow’s National Real Estate Finance Summit. “After we saw the last downturn, things snapped back pretty quickly, but I really think the biggest difference today in ways deals are structured is there are so many ways to put deals together in terms of debt and equity.”
The U.S. economy has been growing since June 2009, the second-longest period of economic expansion in U.S. history, after the one that followed the recession of the early 1990s. Mature economic cycles can lead to industry players seeking capital in different ways, as traditional financing sources tighten lending. For some in commercial real estate, the high net worth individual or family office investor is a capital source on the rise.
“We have a different investor model,” Post Brothers Apartments President Matthew Pestronk said. “It’s not institutional money, but ultra high net worth family money, which is institutional in size and in its ability to invest.”
Pestronk’s fellow panelist and Wrightwood Financial CEO Bruce Cohen described a food chain of capital every developer experiences as they start to build out a company. It often starts with help from friends and family before progressing to high net worth family offices to private equity and finally reaching direct relationships with a primary provider of capital.
After maxing out at the entry level with friends and family capital, Pestronk said his company has found a sweet spot with the ultra high net worth family investor.
“That type of money is looking to get out of the stock market,” he said. “They feel that it is topped out and are now looking for opportunistic-type returns.”
Pestronk describes his network of ultra high net worth family investors as about a dozen multibillion-dollar family offices that either made their money in this lifetime or are just one generation removed from the individual who did. Although Post Brothers Apartments doesn’t typically sell its projects, Pestronk said, with the backing of the family investors, his company develops its projects to be able to underwrite opportunistic returns if they did.
Ultra high net worth individual wealth is hitting record numbers. Global high net worth individual wealth surpassed $70 trillion for the first time in 2017 and is expected to exceed $100 trillion by 2025, according to Capgemini’s World Wealth Report 2018. The 10.6% of growth in this sector is the second-fastest year of growth since 2011.
Real estate accounted for nearly 17% of the group’s investment, up nearly 3% since 2016 when it invested $10.3B in CRE. This upper echelon may provide a steady source of capital, but getting to it is not necessarily easy.
Stiker, whose real estate investment firm includes a mix of high net worth family offices and large institutional fund investors, said there is always room for more developers in the arena of ultra high net worth family capital. The key in securing the investment is articulating to the person whose function it is to find partners and acquisition opportunities how your ideas are better than the competition's ideas. But once an individual has his or her foot in the door, a larger capital network can follow.
“It’s interesting the way people have a cognitive bias,” Pestronk said. “You might have a person who made money in Hollywood, private equity or elsewhere. If he or she invests with you, you must be smart. They’ll tell friends because you’re smart and they invested with you.”
While these wealthy families are providing capital to developers at a late stage of economic growth, the funding stream can also come with eccentricities.
“It’s a fairly unique model and sometimes idiosyncratic,” Pestronk said before joking, “One could decide to not invest in Philadelphia because they once took a train there and lost their wallet, so Philly sucks.”