High Net Worth and Family Firm Investors Do Well Against Foreign/Institutional Investors By Sticking to Secondary Markets

Following up our last article, we looked at a smart tactic for high net worth (HNW) and family office investors: looking into smaller, less obviously-enticing markets. After spotting a recent piece in the National Real Estate Investor (NREI) online, we checked out their recommendations to beating out overseas and institutional investors by playing it smart and finding the right market...which isn't the biggest and most alluring.

We mentioned the “gateway” cities in our last blog article – these being the large, obvious markets like Los Angeles, San Francisco, and New York. These big cities are very competitive among investors; and HNW investors and family offices are working-smarter-not-harder and taking the search for assets into secondary and tertiary markets that aren't immediately alluring to overseas or institutional investors. One financier the article quotes recommends that HNW investors and family offices look for the “scratch-and-dent” deals below $10 million that will need some work. These value-add properties may pan out better than fighting the competition in the larger markets for the more exclusive and expensive multifamily deals.

One company profiled looks for deals across the country in smaller markets like Columbus, OH, Kansas City, MO, and right here in Indianapolis. The company, Kingbird Properties, focuses on acquiring value-add properties in these markets, while allowing the foreign and institutional investors to duke it out over the “trophy” properties. According to the NREI article, this approach is a smart and savvy way to succeed without having to clash with the foreign and institutional investors.

It looks like over the next year that the field may change a bit, with foreign and institutional investors beginning to warm up to the secondary and tertiary markets and possibly cooling their enthusiasm somewhat on the gateway cities. One survey suggests that the next twelve month yields in non-gateway markets will be above risk-adjusted global yields, with gateway city yields losing a little steam. Yet John Sullivan, a representative of foreign and institutional investors, who is also chair of of the U.S. real estate practice at DLA Piper, claims that these investors still aren't eager to stray too far from their market of choice.

Billy Procida, the financier cited, states that the foreign investors with a lot of money to burn and a long view on investment have driven prices up, as well as caused Class-A and net lease property price spikes. Meanwhile, the institutional investors are trying to simultaneously amass large portfolios and developments while enjoying the low interest and also hedging against inflation – this according to a Denver-based real estate company director.

While the foreign investors throw cash around the large markets and institutional investors race to stack their portfolios, HNW investors and family firms can single out the assets in non-gateway cities that are priced lower than what might draw the other big players but still priced higher than other local investors can afford. HNW investors and family firms also benefit by having greater familiarity and comfort with the smaller, non-gateway city markets, while foreign investors feel more comfortable sticking to the large multifamily and hotel properties in the gateway cities.

HNW investors and family offices have the advantage of knowing the areas, being able to put deals together that they could later sell to these larger investors (for example), and being in a sweet spot to purchase property that is priced too low to attract foreign/institutional investors but too high for most local investors to afford. The opportunities for HNW and family firm investors abound; using their familiarity with secondary, non-gateway city markets to find the right value-add properties seems to be the smart bet to succeed, while avoiding the cutthroat competition in the gateway cities with investors unlikely to move too far from their comfort zone.

Elizabeth Wheeler