Wealthy families favor steep discounts and pricing power
Wealthy families still see real estate as a hedge against inflation. But with borrowing costs elevated, they are demanding steeper discounts and stronger pricing power before they commit, chief investment officers told CNBC.
The comments appeared Friday in a CNBC Inside Wealth report by Hayley Cuccinello. They offer American mortgage brokers a window into how private capital views real estate and debt.
Waiting for ‘the really special project’
Rob Haugen oversees private capital investments, mergers and acquisitions at Michels Family Office. He is also chief investment officer of its spinout firm, River1 Asset Management. He said uncertainty over where rates are headed has made the firm more selective.
“Honestly, until we have really strong conviction that rates are headed back down, it’s difficult for us to want to do anything except the really special project,” Haugen said.
He said he typically targets potential yields on cost in the high single digits or in double digits. One way to get there is buying an office building at a heavy discount with a known tenant that will occupy much of the space. Big-box retail is another opportunity. About 18 months ago, the family office bought a Kohl’s near Milwaukee with an investor consortium, Haugen said.
Haugen is also wary of entering a 10- to 15-year lock-up at high rates, according to CNBC.
Inflation protection, with conditions
Joel Houck, chief investment officer of HB Wealth, said he has seen more interest from large family offices in real estate and real assets. These include industrial warehouses, farmland and timberland. He said certain types offer protection against inflation, a top concern for many family offices.
The assets can also be tax-efficient, Houck said. A depreciation shield, for example, can defer taxes on distributions until the asset is sold.
The inflation hedge is not automatic, though.
“With real estate, your inflation protection comes from the ability of the underlying property manager to reset rental rates,” Houck said. “With different asset subclasses like multifamily, industrial, retail, not all rents are reset at the same rate.”
Houck said industrial property and housing can raise rents regularly, and both can benefit from supply constraints.
Higher rates can create chances to buy at a discount, he said, but investors must watch how much debt a fund uses. HB Wealth generally steers clients away from funds with leverage above 65%, whether at the property or fund level.
Mike Silverman, chief investment officer at Cresset, said clients ask often about data centers, but the wealth advisory firm has not pursued them because of the risk.
“I would tend to think of data centers as being a more of a technology investment than a real estate investment,” Silverman said. “You’re investing in a 15-year lease with a major company. That sounds really attractive, unless at the end of the 15 years, the data center is not valuable because of technology change, and so that has caused me to be cautious around data centers.”
The rate backdrop
Borrowing costs remain a hurdle. Freddie Mac’s weekly survey put the 30-year fixed mortgage rate at 7.40% on Oct. 15. That is up from 6.27% a year earlier. The Federal Reserve meets Oct. 27–28 and is widely expected to hold its benchmark range at 3.75% to 4.00%, according to AFP reporting.
What it means for brokers
The CNBC report covers family offices, not residential borrowers. Brokers with investor and commercial clients can still read several signals in it. Well-capitalized buyers are targeting discounted assets with clear tenants. Some advisers are capping leverage near 65%. And long lock-ups are drawing skepticism while rates stay high.
