Risk and Return: How Family Offices Evaluate

When evaluating investment opportunities, family offices bring a unique combination of long-term vision, multi-generational planning, and prudent risk management. Unlike institutional funds that often operate on fixed cycles or quarterly mandates, family offices have the flexibility to take a broader and deeper view of potential investments. At the heart of their decision-making process is a detailed analysis of the risk-return profile, a foundational framework used to determine whether an opportunity is worth pursuing.

While this process can vary depending on the family office’s investment mandate and strategy, there are some common threads, especially when considering asset classes like multi-use and multifamily real estate. These types of investments continue to stand out, not just for their stability, but for their potential to deliver consistent returns while managing risk in a changing economic landscape.

The Metrics that Matter

Family offices typically begin their evaluation by examining projected internal rate of return (IRR), cash-on-cash return, and potential exit multiples. These metrics help assess whether the investment meets minimum return thresholds based on the office’s objectives, be it income generation, capital preservation, or long-term growth.

In the case of multifamily and multi-use projects, strong IRRs are often supported by reliable rental income, asset appreciation in supply-constrained markets, and long-term tenant demand. Cash-on-cash returns tend to be attractive as well, particularly in stabilized assets or value-add opportunities where incremental improvements can unlock additional income without excessive risk.

What makes these asset types even more appealing is their resilience. Multifamily properties, in particular, have shown a consistent ability to weather economic downturns. Even during periods of economic uncertainty, people still need a place to live. Multi-use properties, especially those blending residential, office, and retail components, offer diverse income streams that can help offset weakness in any one sector.

Managing the Risk Side of the Equation

Risk isn’t something family offices try to eliminate, it’s something they aim to understand and manage. A thorough risk evaluation includes several dimensions:

• Market volatility: Is the asset located in a market with strong fundamentals, such as population growth, employment diversity, and limited housing supply?
• Concentration risk: Does the investment overexpose the portfolio to a single geography, asset type, or operator?
• Macroeconomic exposure: How will rising interest rates, inflation, or shifts in government policy affect the performance of the asset?

Multifamily and multi-use investments tend to fare well in this kind of analysis. Their demand is driven by both demographic trends and economic fundamentals. For example, as urban centers continue to evolve, mixed-use developments that combine residential, retail, and commercial spaces are increasingly seen as the future of sustainable, community-driven urban planning.

These asset types also offer natural hedges against inflation. As costs rise, so do rents, especially in high-demand locations. This can preserve income and real asset value, which is exactly what many family offices look for when trying to protect purchasing power over time.

Downside Protection Strategies

Another key consideration is what happens if things don’t go according to plan. Family offices place a high value on investments that offer downside protection, whether through preferred equity structures, senior debt positions, or other protective measures.

Multifamily properties often allow for greater structural creativity. For instance, a family office might co-invest with a developer, taking a preferred equity position that provides a fixed return before any profits are distributed to other partners. Or they might lend against the asset, using the property as collateral, which adds another layer of protection.

In ground-up multi-use developments, developers can build in contingency budgets, reserve capital, and pre-leasing agreements to mitigate construction or lease-up risk. Family offices that understand how to evaluate these strategies, and partner with experienced operators who implement them, can benefit from both upside potential and risk mitigation.

Scenario Planning and Stress Testing

Sophisticated family offices go even further by modeling how an investment will perform under various conditions. This includes:

• Base-case, best-case, and worst-case scenarios
• Sensitivity analysis on cap rate fluctuations, occupancy levels, and rent growth
• Stress tests that simulate economic downturns, delays, or regulatory changes

These exercises provide insight not just into the expected return, but into the investment’s resilience, its ability to remain viable even in less-than-ideal circumstances.

Multifamily and multi-use assets often shine under these models. While luxury condominiums or speculative office projects might falter under a stress test, income-producing assets with diversified tenant bases often hold steady. This is particularly important to family offices, who prioritize capital preservation just as much, if not more, than capital growth.

Final Thoughts

Risk and return are always connected. One doesn’t exist without the other. The key is finding opportunities that strike the right balance between the two, while aligning with a family office’s broader objectives and risk tolerance.

In today’s environment, multifamily and mixed-use real estate continue to offer a compelling profile: predictable income, appreciation potential, and strong fundamentals, all wrapped in a structure that allows for downside protection and long-term value creation.

For family offices committed to making thoughtful, calculated investments, these asset classes present not just a defensive play, but a strategic opportunity to build generational wealth with confidence and clarity.