In spite of ongoing challenges in the commercial real estate sector and the rising cost of debt, it’s been clear that many family offices continue to view real estate as an attractive alternative investment option. For some, they see an opportunity in the fact that they expect real estate investors to have trouble refinancing their properties and may be able to step in as rescue capital and achieve attractive returns in the process.

But not every family office works with old money clients, who might feel more comfortable with the higher level of risk the current real estate investment climate brings with it and more knowledgeable about real estate as an investment option. TwinFocus, a Boston-based wealth advisory firm, tends to work with first-generation high-net-worth individuals who may have smaller investment budgets than those who can set up single-family offices, according to Will Ward, partner and managing director of real estate with the firm. In this role, Ward oversees real estate investment initiatives across both direct and fund investments for TwinFocus, which manages more than $7 billion on behalf of ultra-high-net-worth individuals.

WMRE held a conversation with Ward about what first-generation wealthy families might be looking for in their real estate investment options, how TwinFocus communicates with them about the investment opportunities available to them and what are the main challenges for a multi-family office looking to make real estate deals right now.

This Q&A has been edited for length, style and clarity.

WMRE: I wanted to get a little bit more of a sense about what kind of client do you have, what is the profile of your typical client?

Will Ward: TwinFocus, we call ourselves a multi-family office. I don’t have the exact numbers, but we have somewhere between 30 and 40 families, where TwinFocus provides family office services for them. They typically don’t have their own family office, that’s what they are using TwinFocus for. And depending on what your needs are, we do everything for you, or in some cases, we just manage some investments for people.

Most clients fall somewhere in-between, where TwinFocus is providing investment management services, but also services regarding trust and estate work, and sometimes family management. It could be things like wills or pre-nups, or estate planning. Typically our clients, they are first generation wealth, and in most cases, they are probably still working, so we provide those services for them that would be really expensive for them if they wanted a dedicated family office. It could run into seven figures a year. So, TwinFocus provides those services for a lot less than that because we do it across a number of families.

WMRE: Does their net worth really vary, or does it fall within a particular range?

Will Ward: I don’t have visibility on that because what I do for these families is I make real estate investments for them based on, we have portfolio managers that determine how much of a client’s balance sheet should be invested in whether it’s technology or healthcare or real estate. I sort of get an idea for what size of investments I should be looking for, but we try to keep things pretty separate in the business. Because, for instance, if you are one of our clients, it shouldn’t really matter to me if you’ve got $100 million or $700 million, I should be making decisions independently of that. So, I am not the best person to ask what the average client’s net worth is.

What I do is I find attractive real estate investments that we like and want to do, and the portfolio manager in the firm decides who it’s appropriate for and who it’s not appropriate for. And once they make that decision, they make a sizing decision. Let’s say it’s Bob Smith, and we should only put a million dollars in for Bob, but for Tom Jones, we are going to put in $5 million. Those are non-real estate decisions, those are portfolio allocations decisions.

WMRE: From what you can see in your work, how important is commercial real estate investment to high-net-worth individuals right now, especially when it’s first generation wealth? How aware are they that it’s an investment option? How aware are they about its advantages and disadvantages?

Will Ward: I think it’s an important tool on anybody’s balance sheet to have exposure to commercial real estate. Today, in 2023, it’s kind of tricky, because you can find yourself in “the wrong type of real estate.” If you own downtown Los Angeles office buildings this is probably not a happy time for you.

We concentrate primarily on multifamily, student housing and industrial assets. Which, constructively, we think that those are parts of the market that are never going away, there are just never going to be enough homes in the United States for everybody. Certain people, whether by choice or by need, are going to live in apartment buildings. That’s a market we find attractive and our portfolio managers are making investments that we are not trying to market-time, we are not trying to buy low and sell high, buy an asset today and sell it next year because we think something is going to happen.

We are buying or building income-producing assets for the family’s balance sheet for the long term. Any transaction we look at we typically look at through a 10-year lens of “is this something we would want to own for 10 years?” And if it’s not, then there has got to be a reason, a different investment thesis. But, typically speaking, we are long-term investors, long-term holders, because we are there for long-term value creation and long-term income realization.

WMRE: Do you find, is that easy sell right now? Especially given some of the negative media about commercial real estate, and a lot of it gets thrown in together. Is there basically a level of understanding that long-term commercial real estate is a good investment option and there are differences between the various asset classes? Or is that something you still have to educate people on?

Will Ward: I think most people, or most of our investors, appreciate the long-term value. However, this year, with the change in interest rates and the rapid increase in interest rates, it’s a more in-depth conversation. Because when we were building or buying buildings at 6.5% to 7.5% yield-on-cost, when you weigh that against being able to invest in U.S. Treasury debt at 5.0%, it gets a little more difficult to see the value in the risk you are taking on the real estate side. And things are getting more difficult in terms of financing and locking in current income on some of these projects. However, again, if you look at it through a long enough lens, which is typically how our investors do it, then you can see the potential for long-term value creation or wealth preservation. But I would say in the past six months, the broader macro environment, it causes you to look a little bit harder.

WMRE: Can you give me an example of how these conversations go right now, where the clients came to you and said: “These are my concerns” and what you told them?

Will Ward: I can give you an example. On behalf of a family we are building a property in the Southeast, and instead of taking a construction loan—which nowadays you are lucky if you can get one, but if you do get one, it’s not going to be cheap—we are actually building that building for this investor with a 100% equity. We think we are building it to somewhere between 6.5% and 7.5% yield-on-cost.

We are going to figure out the financing at some point in the future, but that’s a case where it just didn’t make sense to borrow money at 6.5% to build this project, so we are doing it with all equity. I think that some of the conversations we are having with investors are on what amounts of leverage we are going to use, and where and how we are going to use that leverage because it’s just so expensive and a departure from where we’ve been in the past 10 years.

And I think maybe to further that, in any of our opportunities it takes a little more digging than it did before to educate investors on how and why we are doing something because there’s that narrowing of the spread between what we are underwriting yields to versus what the risk-free rate is. It used to be that that spread was 600 basis points or more, and now that spread is 200 basis points. So, the bar on our transactions has been raised.

WMRE: You did mention that for many of your clients it’s about long-term value creation. Are there certain other things that they are looking for in real estate that maybe some of the other alternative investments don’t give them?

Will Ward: Depending on the asset, it gives you different types of exposure. We can get very granular in terms of exposure to whether we are doing an investment in St. Lous or doing something in Boston. It’s more of a portfolio management construct, to be able to granularly get exposure to real estate, but in a market and to a market. If you look at places like Columbus, Ohio, which is going to have a new chips factory from Intel, one way to capitalize on that sea change is to own an apartment building in Columbus, which is something we do. From a portfolio construction perspective, it’s the current income that we underwrite and then the long-term appreciation in assets, which is typical of real estate as a whole.

WMRE: So, they do look at it from the perspective of “I know this is happening in this part of the country or this specific city and I want to take advantage of it”? Or is it more that you advise them that this is what they might want to think about when you are allocating their money?

Will Ward: We look at all markets, and there are things like I just mentioned in Colombus. But there are also markets we are invested in like Knoxville, Tenn. And that’s more student housing investment, when you look at enrollment trends with universities. So, there are different themes that drive our allocation and our investment selection.

WMRE: I wanted to ask about this segment of the market as a whole—family offices and high-net-worth individuals. I know that you recently were giving a talk at a Carmo Companies’ panel in New York about this. What, in your view, are the biggest obstacles for these individuals for investing in commercial real estate? Is it lack of awareness? Is it their financial advisors not being as aware about that as an alternative investment option?

Will Ward: I think the biggest obstacle for real estate investing is just how capital-intensive it is. To do a 100-unit apartment building in whatever city, you are talking about $20/$30/$40/$50 million worth of construction costs. And so, let’s say, you use a 50% construction loan, you are talking about big checks, you are talking about $10/$20/$30 million checks. And that’s if you are using leverage. If you are not using leverage, you are talking about twice that.

So that’s an obstacle—it’s finding the right opportunities for your size of allocation and getting diversification. Because it’s never going to make sense for one family to take their whole net worth and put it into one building in one city. It’s finding opportunities to get invested in a range of opportunities at sizes that make sense for the families. If the families try to go and do this on their own, maybe if you were a multi-billion-dollar family office, you could do that. But when you are a smaller family office or a smaller client of TwinFocus, then getting exposure to these gets more difficult.

WMRE: You mentioned that in some of the deals you are doing you are trying to avoid leverage, or trying to avoid using a lot of leverage. Outside of the current market environment, do you have a specific formula for how much debt or equity you like to use? Or does that just depend on the transaction?

Will Ward: It largely depends on the transaction. But as guideline, we are typically somewhere between 50% and 60%, sometimes getting to 60%, sometimes to 65%. It’s kind of a function of the cost of that leverage. Nowadays, you are constrained by debt service coverage ratios and you don’t want to get into a situation, and the banks quite frankly won’t let us get into situations, where our coverage ratios are low, and as a result, they are pulling back on proceeds and so we are forced to look at transactions that use less debt than previously. But we are still kind of in that 50% to 60% range.

WMRE: Are you finding that in the sectors you invest in, especially multifamily and industrial, there are enough opportunities in the market right now or is that becoming also more of a struggle to find?

Will Ward: It’s getting more difficult for sure. And part of is—I’ll use the term price discovery. There’s been a dearth of transactions, and so it’s hard to gauge what the right price is to pay for something right now, depending on the market. It is getting more difficult. One thing that has changed in the past 12 months is that construction costs were wildly unpredictable a year ago, when we saw those crazy price tags in steel. And we’ve seen those things largely normalize, and we’ve seen labor start to normalize. So that’s gotten a little bit easier. But if we were having that conversation a year ago, it was very hard to price things because you didn’t know how much you were going to pay for materials and labor. That pendulum, I don’t think it’s fully swung, but it’s definitely moving, so it’s making things a little bit easier. But the uncertainty around the Federal Reserve interest rates is causing a lot of pause in transactions. Because again, real estate is such a capital-intensive business that a large portion of investors use leverage and not knowing what you can finance one of these investments for or how much you can finance, causes a lot of pause. And the lending atmosphere, I can’t overstate it, it’s difficult.

WMRE: And you did mention some of the projects you’ve been doing. Can you give me any recent examples, maybe in the past six months, if you’ve made any new investments that you can talk about?

Will Ward: Yes. We’ve made a suburban Boston investment that we broke ground on last month. And then we’ve got a couple I don’t want to mention that they are not signed yet, but they will sign. But in the past year, we’ve opened a student housing project in August of 2022 in Richmond, Va. This past summer we opened a multifamily project in Columbus, Ohio. Last month we’ve opened a project in Kansas City, Mo. In the winter, we will open a multifamily project in Charlotte, N.C. We will also open a project in St. Louis. So we’ve got a lot happening in the next few months. We are still looking at new transactions and we’ve got a couple that we’ve been working on for quite some time that will close this fall, all kind of in the multifamily space.

WMRE: Can you talk about the process of how you communicate with your clients, how often you stay in touch with them about what’s going on with their real estate investments? What does that process look like and how do most of them want to be informed about that process?

Will Ward: It runs a spectrum. Anytime we make a real estate investment, we prepare an investment memo and we try to get our clients on the phone to talk about them through what we are doing and why, and give them a chance to ask questions or become familiar with what we are doing. And then at a minimum, we supply our clients with quarterly statements, and those statements include cash flows of the project, construction status, leasing status.

We also provide them, if it’s say, in Columbus, Ohio, an update of what’s going on with Columbus, or what’s going on with the real estate market, what’s going on with the broader economic forces in an area. And we supply them with a statement of their account, so they can see how much money they invested and how much money they’ve made. And then in addition to that, whenever we get our properties up and running, or making distributions, we will send our distribution notices, which we typically do quarterly. And then at TwinFocus, we are kind of constantly in touch with our clients about all sorts of things. On occasion, if there’s a meeting at the firm about something different, we’ll carve out some time and a member of the real estate team will pop in and give a quick update on our client’s investments in between quarterly statements.

And then we have clients that will wake up on the fourth of October and say “I’d really like to know what’s going on with my real estate portfolio.” And we’ll prepare a presentation and jump on the phone with that client. Our clients have access to a lot of data, we have an investor portal that we run where we keep updates of financial information, qualitative information, market information on all our investments, so they can access that at any time. And then our clients are not shy about picking up the phone or sending an email saying “Hey, I’d really like to get an update on my portfolio.” And in short order, we’ll provide some part of the team to jump on a phone call, or Zoom, or in-person meeting to update them.

Some clients we do a lot, and some clients are satisfied with their quarterly statements and maybe an annual meeting.

WMRE: I am curious, given the state of the market right now, those phone calls, are you seeing them happen more now? Or it has stayed steady and it’s more up to the personality of the client rather than the broader market trends?

Will Ward: I think clients are on average probably a little more attentive or wanting to hear a little bit more in-depth about what’s going on in some of our allocations. I think in years past, there was a rising tide that lifted all boats and just being invested in real estate was okay and beneficial. In today’s world, I think they want to hear a little bit more and we are happy to share that information with them. I have not seen a pivot away from the asset class. I think people are just a little bit more curious to know what’s going on with their investments, and how things are financed and how they are doing and what the strategy is. And we do whatever they want, we get in front of them.  

WMRE: Would you have any advice for financial advisors and RIA on how much should they be thinking about real estate investment right now for their clients, how they should be talking to their clients about it?

Will Ward: It’s hard for me, this is what I bult my career on, so I think people should aways be paying attention to the real estate market. I think that the biggest challenge facing most investors right now is financing their assets and making sure they do it in a way that’s consistent with their investors’ profiles because there are investments out there now that are going to need more capital. And that capital, if they can’t fund it on behalf of their clients, then they will have to go to third parties to get them funded it’s going to be really expensive. I’d say if someone has an apartment building that they are 70% leveraged on and the property is going to have to be refinanced in 2024, there’s a good chance they are not going to be able to secure a new loan for the amount of their old loan. They are going to have to write that check or find someone else to write that check. That’s kind of our biggest challenge in the industry is managing that and making sure that you are poised to handle those situations.

WMRE: Is there anything else that’s important to keep in mind, especially given that the firm does work with more first generation wealth clients?

Will Ward: I think one of the things we do is we try and find investment partners that we can do more than one transaction with. One of the things we do is do repeat projects with the same sponsor. We spend a lot of time trying to find those right sponsors that are not just going to be a one-and-done transaction. We like to find somebody who has a pipeline and who has the propensity and the werewithal to do multiple projects. We spend a lot of time evaluating our partners and if we can find a partner that we like and then do some successive transactions, that’s what we prefer and that’s something that TwinFocus spends a lot of time on, partner selection. We’ve been able to successfully to do that and off the top of my head, we have four or five partners that we’ve done multiple successive transactions with and hopefully will continue to do more.


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