Succession

How genetics and Family Offices are changing the face of global real estate ??

• Many investors cut exposure to real estate, but allocation by Family Offices dropped only marginally according to Knight Frank
• Many Family Offices prefer to invest in real estate directly, according to Goldman Sachs
• BlackRock survey reveals that 63% of Family Office investments were allocated to real estate
• Changing of the guard at many eponymous real estate firms in New York beckons change

The career trajectories of David Solomon of Goldman Sachs and Alan Waxman of Sixth Street parallel the changing of the guard in global finance. Solomon joined Goldman Sachs in 1999 from Bear Stearns in his mid-30s as a partner in the junk bond group, whilst Waxman joined Goldman Sachs a year earlier straight out of Penn university. Solomon rose to become Chairman and CEO as Goldmans and celebrated its 149th year, but Waxman left and co-founded global investment firm Sixth Street Partners in 2009. Fast forward only a few years and the dominance of global banking institutions are being eclipsed by shadow banking institutions, and the personalities needed to run both are very different. Banking personalities are typified by entertaining and delegation, whereas shadow banking by negotiation and execution. Successful real estate acumen has always been a mix of the two.

Whilst deal success can make or break a career, those who are more attractive appear to have an implicit advantage. Based on their facial geometry, researchers created a “Facial Attractiveness Index” of 677 CEOs from S&P 500 companies. They found that CEOs with a higher Facial Attractiveness Index had higher stock returns during their first days on the job, as well as higher acquirer returns following acquisition announcements. Economists had first identified a correlation between better looks and higher wages in the 1990s, although the existence of a "beauty premium" is still hotly debated. Ryan Roslansky, CEO of LinkedIn, augured the success of a CEO best: he believes that none prepared him to run the networking site for professionals when he took over three years ago. “I fundamentally believe you can only learn how to be a CEO by being a CEO,” he says. “On day one in a role like this, you’re entering a world where you’re about to face a large list of unexpected challenges that you don’t know how to do. The problem is the entire world expects you to know how to do it.”

Those that have achieved success have now outgrown the traditional property owning institutions. Knight Frank says it is the first time on record that rich investors have allocated more than institutions to property. According to Knight Frank data, affluent family estates and ultra-high-net-worth individuals spent approximately ï¿¡1.3 billion on acquiring offices in London over the last year. The exclusive club is mostly made up of retail billionaires, sports stars, and shipping magnates. Almost half of the money spent comes from Europe, with the remainder mostly from British and Asian investors. According to Knight Frank data, total investor allocations to property fell 21% last year to $1.12 trillion as rising interest rates began to bite and uncertainty about the post-pandemic future of office buildings grew. However, while institutions such as pension funds scrambled to exit, cutting exposure by 28% to $440 billion, and holdings by trusts and other sources dropped 29% to $222 billion, private investment by wealthy individuals and their families dropped only 8% to $455 billion.

The Citibank Global Family Office Survey told a similar story, with more than half of respondents keeping their real estate weightings the same, while nearly a third increased them this year, although respondents expressed mixed feelings, citing concerns about interest rate hikes, upcoming refinancing, and vacancy rates.

The attraction of real estate to Family Offices is discussed by Goldman Sachs in their report “Eyes on the Horizon”. The report highlights that Family Offices have substantial investments in alternative asset classes, including private equity, private real estate, infrastructure, hedge funds, and private credit, making up 44% of their holdings. Moreover, these Family Offices plan to increase their strategic allocation to alternative assets over the next year. While they typically use managers for most investments, when it comes to private real estate, many Family Offices prefer to invest directly. This preference may stem from their familiarity with the asset class, as several families have gained wealth through real estate or have experience in its ownership and development. Additionally, real estate is seen as an effective means of wealth preservation with potential tax advantages for intergenerational wealth transfer.BlackRock conducted a survey of 120 Single-Family Offices with a total asset value of $243 billion. The survey revealed that 63% of their investments were allocated to real estate, and a significant 86% of these investments met or exceeded performance expectations in the preceding 12 to 24 months. When asked about anticipated changes in asset allocations for 2023, considering major policy initiatives like the U.S. Inflation Reduction Act and the European Commission's Green Deal Industrial Plan, respondents expressed strong confidence in infrastructure and remained bullish about real estate investments.

According to the FINTRX Private Wealth Data Report, real estate accounts for 19.8% of the wealth held by the North American Family Offices. According to the report, Family Offices place a high value on real estate knowledge, and many have hired prestigious high-performing managers for in-house roles overseeing ground-up development, direct investing, and real estate fund creation as an embedded business strategy. Furthermore, families with extensive real estate backgrounds have become sponsors of other Family Offices and ultrahigh net worth individuals seeking to invest directly in projects and share in the risk in exchange for appealing co-GP economics not typically available in the market. These arrangements are typically based on financial transparency, control sharing, and flexibility in holding periods to allow patient capital to find a home.

Some notable successions are taking place among key figures and family-owned firms. William Rudin has designated his children, Samantha Rudin Earls and Michael Rudin, to succeed him as co-CEOs of Rudin Management Company in early 2023. At Silverstein Properties, CEO Marty Burger is stepping down, and Larry Silverstein's daughter, Lisa Silverstein, will assume the role of company chief. Andrew Mathias, president of SL Green Realty, will depart at the end of the year after nearly two decades with the company. Developer Richard LeFrak, at the age of 78, is preparing to transition leadership at his eponymous firm, recognizing the importance of the next generation gaining decision-making experience. What of the future of these firms? In his book “Hidden Potential: The Science of Achieving Greater Things”, Adam Grant debunks the theory that learning from the best is the way to greatness. A study conducted by economists found that learning from experts doesn't always yield the best results. They examined data from Northwestern University spanning from 2001 to 2008 to determine if students who took introductory classes with more qualified instructors performed better in subsequent courses. Contrary to expectations, the data revealed that students who had expert instructors in their introductory classes ended up with poorer grades in their follow-up courses. Grant writes that the more skilled we are at something, the harder it can be to explain all the pieces of that skill. So “picking an expert’s brain” will often lead us awry, “The point of engaging guides isn’t to blindly follow their leads,” Grant writes. “It’s to chart possible paths to explore together.” Gumption and risk taking were the hallmarks of these great family run real estate firms, but a different skill set is required to succeed today, including forensic location analysis, property data collection, tenant engagement and financial innovation.

Deal making nous has always trumped attraction, and experience and connections count for a lot. Jon Mechanic is one such individual, the doyen of New York real estate deal marking. His career has paralleled a transformation of the real estate industry - from a buccaneering trade once dominated by a group of New York families to one that has grown larger and more sophisticated, with increasing flows of foreign and institutional money, complex financial engineering and more government regulation. “You couldn’t do real estate in New York without running into Jon Mechanic,” said Jonathan Gray, president of the Blackstone Group, the alternative asset manager that is one of the property industry’s biggest players. “He has just built up this reservoir of goodwill that is very special and unique.” One top architect called Mechanic “the most New York of New York characters. He’s Zelig-like.” This person described his speciality this way: “If two giant egos have to be brought together in a room to get a deal done, Jon Mechanic is the guy you call.” Asked whether Mechanic was indispensable or merely ubiquitous, the architect at last concluded: “His ubiquity makes him indispensable.”

The ultimate lesson for Mechanic was the importance of getting the deal done, quoted in an expose in the Financial Times. That is, to identify those elements that are vital to the parties and disregard the rest. If it sounds simple in theory, it is complicated in a business where there are seemingly endless opportunities to not do deals. Disputes with city authorities, lenders, partners, potential tenants and others are the obvious ones. But time itself can be an antagonist. The longer it takes to finalise a deal, the longer the wait to begin generating revenue to pay back lenders. “It’s a thicket to get things done,” Gray, the Blackstone executive, said, bemoaning the growing complexity of the business. Unlike the progeny of Logan Roy in the hit TV series Succession, success [in real estate] need not be achieved via preternatural good looks; but in the combination of taking risk and careful analysis, charm and financial proficiency, connections and network, and in today’s climate, more important than all is access to capital, likely from a Family Office.