What’s Changing With Family Capital Investment
- Nov 16, 2017
Family capital, family investment firms, permanent capital investors or simply family offices: whatever you choose to call them, companies managing investments and trusts using one (or more) family’s own wealth as financial capital are becoming more prominent when it comes to real estate purchases or developments. Specialists claim that the simplified decision-making process is what makes family offices stand out in front of private equity establishments.
Deloitte’s 2017 “Essential Tax and Wealth Planning Guide” reports that interest in family offices has grown due to several factors, including Baby Boomers selling their businesses and reinvesting the resulting liquid assets to sustain, enhance and protect the family’s wealth. Market volatility, banking and business failures, cybercrime and investment fraud have also contributed to family investors’ decision to take a more hands-on approach over investment policies.
Matthew Pestronk is the co-founder & president of Post Brothers, a company he created with his brother Michael Pestronk, which is focused on developing and operating high-end apartment buildings in northeastern markets such as Philadelphia and New York. Pestronk discussed with Multi-Housing News the firm’s strategy and newest projects as well as the challenges in the business.
How have things changed in recent years for family office investments in real estate?
Pestronk: Family offices have become a more prevalent source of capital in real estate as wealth has grown through private businesses and the stock and bond markets, and as families have sought to diversify their wealth in different types of real estate investments. At Post Brothers, we have raised over $400 million of family office capital and are constantly in touch with our partners and prospective partners who are looking for long-term investments.
What are the challenges when it comes to family office real estate development?
Pestronk: Family offices are, by definition, closely held investment businesses that invest capital for one family as their primary reason for existence. One thing that is the same across all family offices is that each one is totally unique in terms of its overall personality. Personalities, processes, people, investment capacity etc. all vary from family to family.
In some instances, the family office may or may not execute actual real estate development themselves. The family offices with which we do business typically rely on our expertise as developers. Investment strategies for different family offices can change according to the desires of the clients (i.e. the family members involved in the deals). The challenge is understanding how families feel about asset classes within real estate, risk and specific markets, when they have not clearly defined investment parameters.
What can you tell us about your investment strategy? Why do you prefer adaptive reuse projects?
Pestronk: Post Brothers is vertically integrated, meaning we lease and manage our own properties, which not all developers do. We also serve as our own general contractor on our projects, which almost no other developers do. This ensures that we have control of the process from conception to completion, including the sourcing of our materials, designs and financing.
Adaptive reuse and major renovations are a variation on value investing, where a developer is betting on using the shell or “bones” of an existing structure to deliver a new project that will be below replacement cost and typically faster than ground-up construction. We typically prefer to invest in markets where ground-up construction is prohibitively expensive for most developers, because we find that entitlements are time consuming and costly. We have found that adaptive reuse in these markets is a highly sensible strategy.
Could you tell us about an adaptive reuse project that you are working on?
Pestronk: Our signature adaptive reuse initiative is called Presidential City, where we’re putting the finishing touches on a 1,000-unit gut renovation and repositioning of a formerly antiquated apartment complex on City Avenue in Philadelphia. As part of that effort, we’ve completely modernized and “greened” each of the residents, in addition to building a four-acre, resort-style amenity center called Sora Pool Club.
How do you choose the market/location for your next project?
Pestronk: First and foremost, we look for unmet rental demand in a submarket. The primary characteristic we look for in these markets is a significant stock of single-family housing that is too expensive for conforming mortgage limits in an area. For example, most houses are more expensive than the first-time homebuyer Federal Housing Administration mortgage limitation allows, which ranges from around $424,000 to over $636,000. Relatively expensive single-family housing stock is an indication of an upwardly mobile demographic choosing to put discretionary spending towards housing—which, for us, validates an area as desirable.
While we also own many developments in established areas where there are other institutional-scale, professionally managed apartment properties, we prefer to be the first mover when delivering projects in an underdeveloped sub-market.
How do you expect the family office business to evolve going forward?
Pestronk: We are solely focused on managing family office capital in our projects, so we are confident that we know what our partners want to see from the deal. They want a manager with an angle or edge that sets us apart from the competition. Most family offices manage money from someone who earned it by coming into an established industry from a differentiated angle, with a higher risk/reward proposition, and that is how they were able to earn their fortune. We feel that the high-quality product, submarket focus and vertical integration with partners provide a unique proposition as a sponsor of investments.
Image courtesy of Post Brothers