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Writer's pictureRyan McKenna

High Net Worth Investors Continue to Cash In on Commercial Real Estate

Updated: Jul 23, 2019


Exclusive Research: Written by Beth Mattson-Tei


The demand to increase real estate allocations among this investor class remains healthy.

Despite the access to information and transparency available in today’s marketplace, attracting high net-worth-investor (HNWI) business relies heavily on relationships that, once established, tend to be held close to the vest. The good news for commercial real estate firms is that the segment of the investment market is growing, and the dollars allocated to real estate are rising along with it.

According to exclusive research from NREI’s 2017 HNWI Research Report, 55 percent of respondents expect HNWIs to increase allocations to real estate in 2018, while 36 percent expect allocations to remain the same and only 9 percent anticipate a drop.


The demand to increase real estate investment is still healthy, although it does represent a slight dip compared to the 2016 survey, when 59 percent of respondents expected allocations to rise and 32 percent predicted allocations to remain steady. That decline in sentiment could be due to the fact that the real estate cycle is moving into a later stage when property values in some markets are nearing the peak and income growth and total returns are slowing.

“The biggest challenge is educating HNWIs on the change in the market. If they have been active in either real estate and/or the stock market, they have an expectation of double -digit gains,” writes one respondent. “However, those opportunities are more abundant when in the growth phase. We are close to the end of a growth phase and starting the peak phase of the market. Therefore, yields may be somewhat decreased.”

Investors increase allocations

For those who are planning to increase allocations, the rise is relatively modest. Nearly one in four investors (23 percent) expect allocations to rise by less than 5 percentage points. In addition, 22 percent anticipate an increase of between 5 and 10 percentage points, and one in 10 investors plan to raise allocations by 10 percentage points or more.


However, some respondents believe that HNWIs could make a bigger move into commercial real estate investing. “There is huge money out there and it is getting nervous about the stock market,” writes one respondent. Wall Street has been on a bull run since the dust settled on the presidential election late last year. As of Nov. 8, the Dow Jones Industrial Average has generated a trailing one-year return of 21.5 percent.

“With the high-net-worth individual, what we have found is that there has been more and more demand for real estate,” says Yuen Yung, CEO of Casoro Capital, a multifamily real estate investment firm that serves HNWIs, family offices and institutions. The biggest driver behind that demand is concern that the public markets are overvalued. “They want to capture some of those gains from the run-ups and reallocate towards hard assets like real estate,” he says.

Even modest increases in allocations to commercial real estate could translate to a big jump in dollars, given the fact that the HNWI market is experiencing steady growth. Globally, the HNWI population expanded by another 7.5 percent in 2016, while the wealth held by that group increased by 8.2 percent. The global HNWI wealth is on track to exceed U.S. $100 trillion by 2025, according to the 2017 Capgemini Global Wealth Report released at the end of September. Specific to the U.S. market, the HNWI population increased by 7.6 percent to reach 4.8 million, with total wealth estimated at $16.8 trillion.

According to the NREI survey, the majority of respondents estimated that high net worth investor allocations in commercial real estate fall between 6 and 25 percent, with the mean allocation at 20 percent.

Investors adapt to mature cycle

One question is how HNWIs will modify investment strategies as the current real estate cycle continues to stretch into extra innings. Similar to the broader investment market, HNWIs are becoming more selective. Generally, they are sticking to the top 25 metros and in-fill locations that are likely to hold their value over the long-term, notes Randy Blankstein, president of The Boulder Group, a commercial real estate firm specializing in triple net lease investments.

HNWIs and family offices have a dominant presence in triple net lease investment sales, accounting for about two-thirds of the market. “We are seeing them be more selective as we are in the later stage of the market,” says Blankstein. There is a “flight to quality.” They are buying at the top end of the market, focusing on top credit tenants and top locations, and they are willing to pay aggressive cap rates to acquire those assets, he adds.

Over the past few years, high net worth investors were more focused on buying income-producing properties. That is now shifting to more emphasis on properties that have strong residual values. “They are willing to pay what seems like very aggressive pricing to everyone else, but to them they are much more focused on what they will be leaving the next generation versus what’s the income for the next 10 years,” says Blankstein.

The biggest objective respondents identified for HNWIs when buying real estate was preservation of wealth. On a scale of 1 to 5, wealth preservation continues to score the highest at 4.6 in the survey. Other goals remain close behind, including income production (4.1), asset value growth (4.0), tax purposes (3.7) and estate planning (3.5).


Digging into the survey responses reveals widely mixed views on how the importance of these factors has changed in the past 12 months. Some HNWIs are taking a more aggressive stance in order to boost returns in a slower growth market and are looking for investment opportunities in secondary markets. For others, the emphasis is on buying cash flow and income producing properties in a market where prices are higher, and in some views, the market is over-valued.

There is a definite underlying current of caution and uncertainty and wealth preservation continues to be a mantra for many HNWIs. “Value growth has been realized,” writes one survey respondent. “Going forward it is likely to continue to stabilize and is less significant today with preservation of wealth growing in importance.”

Respondents also voice concerns about potential issues ahead that could impact real estate investing strategy related to political uncertainty, tax reform and rising interest rates. “There has been a bifurcation of goals with our investors. Some are still on the value-add end of the curve, while at least a couple of our major investors have begun to focus more on preservation of wealth and the core/core plus products,” writes one respondent.

Apartments remain a favored sector

Although HNWIs have a sustained appetite for commercial real estate, they may be looking at other investment vehicles versus buying direct.

Data from Real Capital Analytics (RCA) shows that acquisitions from HNWIs during the first three quarters of the year dropped 45 percent to $3.1 billion, compared to the same period last year. That decline could very well be due to some of the hurdles that exist in the direct investment market. Respondents consistently voiced frustrations related to pricing, competition and the ability to find attractive deals that offer appropriate returns.

Sales data also shows that investors continue to favor apartments. According to RCA, apartments accounted for 46 percent of investment sales during the first three quarters of 2017, followed by retail at 18 percent, office at 16 percent, hotel at 10 percent and industrial at 7 percent.

Most investors still like the demographics that apartments offer. The combination of baby boomers not wanting to own homes and millennials that are staying in the rental market longer, either because they are unable to buy or simply delaying that decision to buy a home, supports strong renter demand. “All of that combined is what continues to fuel the multifamily sector and allowing it to continue to grow,” says Yung.

Multifamily continues to attract a large amount of investment capital, agrees Fundrise COO Brandon Jenkins. However, millennial renters that drove much of the growth in multifamily over the last 10 years are now starting to look at buying homes. This shift toward single-family home ownership is likely to fuel more interest in single-family home investment vehicles that allow investors to capture the benefits of that trend, he adds.

Although many respondents invest in multiple property types, most are active in multifamily and office at 62 percent and 56 percent respectively, followed by retail at 54 percent, industrial at 44 percent, and hotels and medical offices both at 30 percent. Those results remain consistent compared to 2016 survey results.

In terms of ranking property sectors, multifamily stood head and shoulders above all other options. In all, 69.1 percent of respondents said that is the sector HNWIs prefer (up from 67.2 percent in 2016). Industrial was a distant second at 39.6 percent (up from 36.2 percent). Medical office (28.6 percent) and office (27.8 percent) each fell slightly from last year (36.2 percent and 33.9 percent, respectively). Retail, meanwhile, suffered a precipitous decline, from 33.9 percent in 2016 to 17.1 percent in 2017. (Respondents were allowed to select multiple property types).


HNWIs are not interested in big-box retail or malls, but they are looking for retail assets that are more internet-proof, such as gas stations, grocery stores and fitness centers, notes Blankstein. Changes in the retail sector may also cause some HNWIs to do some shifting and reorganizing within their real estate portfolios over the next five years as they look to reduce exposure to some types of retail real estate, he adds.

As for market size, 64.2 percent of respondents said high net worth investors prefer primary markets (down from 70.3 percent in 2016), while 55.2 percent prefer secondary (up from 50.1 percent in 2016). Only 8.1 percent said HNWIs prefer tertiary markets. (Respondents were allowed to select more than one option.)

Competition heats up for HNWI capital

The HNWI business is very relationship driven, and real estate investment firms looking to tap into that market have to also get past the gatekeepers—broker-dealers and registered investment advisors. Oftentimes those advisors lean more towards public real estate investments, such as REITs, because of the liquidity, notes Yung. “So it is not an easy market to crack,” he says.

Private real estate equity funds continue to be the favored choice for real estate allocations. Overall, 56 percent of respondents said they expect allocations to be made through that vehicle. Other top choices for real estate investing include direct investment in multi-tenant commercial real estate assets at 46 percent, direct investment in net lease assets at 33 percent and investment in publicly- traded REITs at 31 percent.


Non-traded REITs is one sector that is continuing to pursue HNWIs as it works to regain its fundraising momentum. The sector has seen fundraising fall sharply over the past three years due to new regulatory changes, as well as a scandal that brought down one of the biggest players in the sector. However, fundraising is making a comeback. Robert A. Stanger expects fundraising to grow from $4.4 billion in 2017 to $8.0 billion over the next four years.

Growth is expected to come from wirehouses such as Morgan Stanley and Merrill Lynch that are starting to allocate more funds to the newer net asset value (NAV) non-traded REIT products on behalf of their clients, notes Kevin Gannon, president and managing director at Robert A. Stanger & Company Inc., a real estate investment banking firm based in Shrewsbury, N.J. In addition, the big-name players such as Blackstone and Starwood that have entered the non-traded REIT sector have helped to “legitimize the space” that already has about $70 billion in equity, he says. “We think over the next 10 years it will easily double in size as the Wall Street firms tap into this investment opportunity,” he adds.

Respondents were also asked what might dampen HNWIs’ interest in real estate. More than half of respondents (51.3 percent) said a real estate downturn would have the greatest impact. That was followed by a change in the tax code (41.0 percent), a recession (35.0 percent) and an increase in interest rates (33.5 percent).


The HNWI business is always going to be competitive, and there are more players that are fighting for a share of the market. “As with most industries, the rapid introduction of technology is lowering barriers to entry, only making the space more competitive,” says Jenkins. This makes providing the best product increasingly important. Industry veterans can’t simply win business based on their name as investors are getting smarter and have a lot more information available to them in their decision-making, he says. “To win customers, you must do something different and provide an authentically better investment product,” he adds.

Survey methodology: The NREI research report on high-net-worth investment in commercial real estate was conducted via an online survey distributed to NREI readers in October. The survey results are based on responses from 545 participants. Of the total survey respondents, 30 percent identified themselves as private equity investors or syndicators, 21 percent identified as building owners/developers, 20 percent identified as building owners/managers and 18 percent said they were in leasing and/or investment sales. In addition, 46 percent described their role in the commercial real estate industry as a private investor; and 52 percent said they were owner/partner/president/chairman/CEO or CFO-level executives.


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