Neville Isaacson's initial foray into commercial real estate investing in the early 1980s nearly marked his last. An immigrant from South Africa, Isaacson used his $25,000 of equity capital to develop condominiums in the Los Angeles area with three other partners. But when interest rates ballooned to 23% and shut down the home-buying market, he bailed out and eventually redirected his investment strategy at rental housing.

Some 25 years later, Isaacson owns a $100 million portfolio of Class-B multifamily assets primarily in the Southeast, a region that has enjoyed steady population and employment growth over the long term despite currently experiencing hiccups on both fronts. He entered the Southeast after selling most of his Southern California assets at the top of the market a few years ago. He'd like to start buying again in the Golden State, which is where he accelerated his property acquisitions during the real estate crash of the 1990s.

The problem is that prices haven't dropped to levels where Isaacson thinks they should be despite the downward pressure that the frozen credit market and economic slump have put on property values. Still, he predicts, the slipping prices are close to igniting a new cycle of value creation, the main reason Isaacson chose property investing shortly after he moved to the U.S. roughly 30 years ago.

“I did a survey of other businesses and saw that real estate was where the value was long-term and decided it was the best thing for me to do in this country,” says Isaacson. He now counts his son and daughter as partners to help source deals and manage roughly 2,000 units largely located in Georgia, South Carolina and Alabama. “But right now, I'm just sitting on the sidelines,” he adds.

Investor evolution

Isaacson is one of tens of thousands of individuals known as high-net-worth investors in the U.S. who have put their dollars into commercial real estate to build wealth, diversify investment portfolios and fund retirement. Historically, real estate experts have defined high-net-worth investors as small owners who typically acquire non-institutional assets for less than $20 million.

But that definition has morphed over the last decade to include super-rich individuals, syndications, operators who partner with private equity funds, families and others. Harvey Green, president and CEO of the Encino, Calif.-based Marcus & Millichap Real Estate Investment Services, for example, includes investors with as little as $500,000 in equity to as much as hundreds of millions of dollars in equity by his definition.

“We see all kinds of people across the board using real estate to build wealth,” says Green, whose firm has built its 38-year-old business almost exclusively in the high-net-worth arena. “There are people who do it as professionals, and there are professionals in other fields that get involved in real estate.”

Regardless of their size, many high-net-worth investors like Isaacson continue to hunt for deals. More often than not, however, the would-be buyers are cooling their heels due to what they consider lofty and unrealistic expectations by sellers.

The number of property transactions of between $5 million and $20 million during the first eight months of 2008 fell 45% from the same period in 2007, according to New York-based Real Capital Analytics. Meanwhile, dollar volume retreated 52% during the first eight months of this year versus the first eight months last year.

Daniel Altman, an apartment investor who owns some 7,000 units in New Jersey, Pennsylvania and Delaware with various partners, says that prices have yet to drop in and around Philadelphia. “And the debt markets are much tougher than they were a year ago,” he adds.

Critical mass

Still, the small high-net-worth market propels the vast majority of all commercial real estate investment transactions. Despite the dramatic drop in activity and dollar volume, 92% of all sales were below $20 million in the first seven months of 2008 compared with 84% over the same period in 2007, according to Marcus & Millichap, which brokered $20.7 billion in investment sales last year.