October 12, 2021

Legacy asset management: successfully navigating the dynamics of family real estate

Managing asset portfolios is complicated and exciting. It’s like holding a hand in a card game: you have a collection of cards, and you’re strategizing how to play them—but someone else owns the cards, has staked you to the game and is counting on you to leave the table a winner. It’s what I love about asset management—the complexity and the opportunity—and NAI Elliott has been quite successful in this area of expertise.

For us, asset management falls into one of two categories. There’s institutional asset management, where you’re managing a portfolio for an entity such as a real estate investment trust (REIT) or an investment firm. Then there’s legacy asset management, where you’re working with multigenerational family ownership. Institutional management is more dispassionate; you don’t really have a personal relationship with individual investors. In legacy management, you’re dealing with all the emotions, internal dynamics and messiness you find in any family. We’ve always emphasized legacy asset management at NAI Elliott, and we work with some of the most prominent families in the region. We’ve learned that it takes specific skills and strategies to do it well.

A passion for the properties

Of course, these two types of asset management have the same fundamentals: the focus is on ROI, wealth preservation and income stream. But there are underlying distinctions between the two groups of investors that directly shape both day-to-day and long-term management.

For starters, there’s a level of passion involved in legacy properties that you can’t find anywhere else. The buildings can be very personal to the owners, and pride of ownership is often distinctly tangible. A particular property can essentially be a symbol of the family’s “personal brand,” so their decisions for it can be emotional, not just logical. They’re typically very interested in maintaining its condition and place in a city’s architectural or business makeup, and that legacy and passion are often passed down to succeeding generations of the family.

Personal involvement in decision-making

With a legacy property, you have to be sure it’s meeting the family’s current needs. Family owners are often more present day-to-day, sometimes even occupying space in the building, and very tuned in to what’s going on with the property. One of the benefits of family ownership is that they can make decisions more quickly compared to an institutional owner—but then, they can also be virtually incapable of reaching a decision, depending on internal dynamics.

The decision-making process becomes much more critical as upcoming generations enter the picture. The current generation fostering the involvement and education of the next generation of family members is very important, but it’s often neglected or even intentionally avoided. The stress of decision-making grows for both generations as time passes, especially if there continues to be a lack of involvement and knowledge of goals, operations and management.

Achieving goals across generations

These elements inevitably influence how we manage a legacy portfolio. There’s often a balancing act between meeting the needs of the current generation and providing for succeeding ones. An effective asset manager steers planning with an eye on both groups; it’s paramount to create a portfolio structure that works in both directions.

In succeeding generations, the number of owners involved tends to multiply, so one approach we’ve used is to build a diverse portfolio with a small number of holders in each property—matched up to their goals for return, income, etc. Some members may be interested in long-term value gain, others in immediate cash flow, so you can “sort” holdings by individual interests. The key goal is creating a structure that everyone agrees to, and that it’s absolutely clear what will happen in a given situation. And at times we have to tactfully remind an upcoming generation that the preceding group has the power to make decisions that affect the younger members.

Dollars today or dollars tomorrow

So how is asset management playing out in today’s market? Let’s look at the Portland CBD office market. Pre-pandemic, we were in the midst of what’s been referred to as the “Amenity Wars.” Owners were making huge investments in lobbies, fitness centers, conference rooms—building areas that are extraneous to the tenants’ operations. Landlords perceived those investments as the best way to attract and retain tenants.

But those are costly improvement projects, and through the pandemic they’ve proved to be of little value in attracting and retaining tenants. Beyond that, they compete with typical long-term maintenance and improvements: security systems, parking, elevators, HVAC, etc. When you factor in the family’s goals for a property, you’re faced with decisions—especially if they’re more interested in cash flow than value preservation or enhancement. It’s a “dollars today or dollars tomorrow” situation. So in the last couple years, we’ve spent a lot of time thinking about the best strategy for a given building’s owners.

Here are the crucial elements:

• Spending that’s fundamental to keeping the asset (the building) viable over the long run;

• Specific tenant improvements that enhance the tenants’ leased spaces rather than common areas;

• Maintaining appropriate cash reserves for unforeseen spending needs and as a buffer against pandemic-related loss of revenue; and

• Maintaining a reasonable level of owner distributions.

That’s a lot of potentially conflicting considerations. After extensive analysis, the NAI Elliott team concluded that we should spend on the spaces tenants actually use. So instead of renovating currently unused common areas such as fitness centers and conference rooms, we’re spending money on the leased spaces for new or rollover tenants. And we continue to spend on building infrastructure for the long term. We think this delivers the best balance of long-term viability and short-term tenant retention and new-tenant attraction.

NAI Elliott is the asset manager, the property manager and the leasing agent for many of the managed assets, so the impacts of our decision are easily measured. During the pandemic, our approach of focusing on core building system upgrades and improving tenants’ spaces has produced excellent results in a tenuous market.

As an asset manager, the passion I encounter in working with legacy groups is one of my favorite aspects of the job. NAI Elliott itself is a multigeneration family business, and that perspective, coupled with the personal interest we take in our clients, has been a key factor in both our success and that of our legacy clients.

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© 2020 NAI Elliott - All Rights Reserved

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