Family Offices and the Underperformance of Legacy CRE Holdings

For Family Offices managing diversified portfolios, commercial real estate has traditionally served as both a reliable income generator and a wealth preservation tool. The sector’s reputation for stability made it an attractive complement to equities, fixed income, and alternative investments. Yet in today’s market, many long-held assumptions are being tested. Legacy holdings, particularly in office and retail, are underperforming in ways that require careful re-evaluation and strategic decision-making.

The day-to-day reality for many Family Offices is a balancing act. On one hand, there is the need to safeguard generational wealth by minimizing risk. On the other, there is the responsibility to position assets for growth in an environment that looks far different than it did even five years ago. Legacy commercial real estate holdings sit at the center of this challenge.

Office Sector Weakness

Few areas illustrate structural change as clearly as the office sector. Remote and hybrid work have permanently altered demand for space. Even in strong markets and historically desirable locations, older office properties are experiencing elevated vacancies. Tenants are downsizing, consolidating, or seeking newer buildings with modern amenities and energy efficiencies.

According to CBRE, U.S. office vacancy rates reached nearly 20 percent in 2024, the highest level in three decades. Legacy buildings without significant upgrades are struggling most. For Family Offices holding these assets, the issue is not just reduced rental income. It is also declining valuations, extended lease-up timelines, and higher capital expenditures needed to remain competitive.

This environment is forcing a strategic reckoning. Should capital be deployed to reposition these properties with extensive upgrades? Or is it more prudent to exit and redeploy capital into sectors with stronger fundamentals? Each decision requires weighing near-term cash flow pressures against long-term portfolio objectives.

Retail Disruption Continues

Retail, too, remains an area of structural change. While experiential retail and mixed-use projects are seeing renewed interest, traditional centers anchored by department stores or big-box retailers are still under pressure. E-commerce penetration has stabilized at higher levels than pre-pandemic, and consumer preferences have shifted toward convenience and experience rather than traditional footprints.

Data from Cushman & Wakefield highlights the challenge: while neighborhood centers with grocery anchors are resilient, vacancy rates for older malls and secondary retail properties remain elevated. For Family Offices with legacy retail holdings, these shifts have meant rethinking revenue models, exploring adaptive reuse, or in some cases, absorbing extended periods of underperformance while repositioning strategies take shape.

The key question is no longer whether retail has changed, but how portfolios should adapt to reflect this new reality. A “wait and see” approach often results in carrying costs without meaningful upside, especially for properties tied to outdated retail concepts.

The Mismatch of Holding Period Assumptions

Beyond property type, another source of underperformance stems from holding period assumptions. Many investments were originally modeled on three to five year horizons, with the expectation of refinancing or exit during favorable market cycles. Today’s environment has disrupted those timelines.

With $1.8 trillion in commercial real estate debt maturing by 2026, refinancing challenges are mounting. Interest rates remain elevated, lenders are more conservative, and valuations for certain asset classes have declined. Projects expected to turn over within a set window are now extending far beyond their initial underwriting assumptions.

For Family Offices, this creates a mismatch between planned liquidity events and actual outcomes. Longer holding periods tie up capital, limit flexibility, and can create friction with broader asset allocation strategies. It also forces more active management of assets that were initially expected to be relatively stable.

Implications for Family Offices

The underperformance of legacy CRE holdings is not merely a market phenomenon. It intersects directly with the mission of Family Offices to preserve and grow wealth across generations. The challenges facing older office and retail properties, combined with shifting holding period realities, require deliberate responses.

Some implications include:

• Reallocation of capital. Redeploying capital from legacy assets into sectors with stronger fundamentals, such as industrial, multifamily, or specialized properties like data centers and healthcare facilities.
• Repositioning strategies. Investing in significant renovations, energy upgrades, or adaptive reuse projects to breathe new life into underperforming assets.
• Liquidity planning. Adjusting expectations around exit timelines and incorporating greater flexibility into asset allocation strategies.
• Debt management. Being proactive about refinancing options, even if that means engaging with private lenders or alternative financing sources to bridge gaps left by traditional banks.

Navigating Forward

For Family Offices, the solution is not a one-size-fits-all strategy. Each legacy holding carries its own set of circumstances, from location and tenant mix to financing structure and family objectives. The key lies in proactive evaluation. Assets that no longer align with long-term strategies should be considered for exit, even at compressed valuations. Others may warrant additional investment if they can be repositioned to meet modern tenant demands.

The broader point is that yesterday’s assumptions no longer apply. The idea that office and retail could be counted on as stable, long-term performers has been upended. For Family Offices, clinging to outdated expectations only compounds risk. By acknowledging structural changes and adapting strategies accordingly, these holdings can be managed in ways that protect wealth and create new opportunities.

A Moment for Strategic Clarity

The current environment is undeniably challenging, but it is also clarifying. It reinforces the importance of active portfolio management, disciplined decision-making, and alignment with broader family objectives. For some Family Offices, this will mean pruning legacy holdings and rebalancing exposure. For others, it will mean leaning into adaptive reuse or emerging sectors that reflect the future, not the past.

What is certain is that underperformance cannot be ignored. Addressing it head-on, with a willingness to adapt and a focus on long-term preservation and growth, is how Family Offices can ensure that commercial real estate continues to play its role within diversified portfolios.