How to escape competition in RE investing?

I often think about investing and entrepreneurship through Peter Thiels Zero to One framework of escaping competition through creating monopolies and unique distribution. Thinking about real estate through this lense for years i've shied away from going deep here until recently when I started to dive in a little deeper.

I'm curious how the RE monkeys on WSO think about escaping competition or being unique in RE investing?

Whats your edge? How do you find alpha in a capital intensive commodity product ?

 
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Real estate is comparatively actually one of the easiest investment classes to generate alpha relative to other asset types. This is primarily due to several factors including the complexity of its investment timeline and process, impact of local market forces/locality, and importance of relationships.

  • Complexity of investment timeline and process - if you really take a step back and look at the longest potential timeline for a real estate project (from an un-entitled piece of land all the way through the final sale of the stabilized final product) it is pretty incredible how many moving parts and skill sets are needed to execute real estate effectively. The approval, design, construction, marketing, lease up, stabilization and sales process all require vastly different skill sets, personalities and knowledge to execute. What does this mean for generating alpha and finding an edge? It means there are so many different parts or processes where you can add value that you can find a step that matches your strengths, knowledge and what you enjoy doing to maximize your individual talent like no one else can.

  • Impact of location and immediate market forces - real estate is also the asset class that is most affected by the immediate, local market forces which drive that individual community, neighborhood, city or even state. Because of the differences in culture, temperature, proximity to the water, etc location is one of the few factors that is near impossible to scale. Particularly in development, municipal rules and regulations vary greatly which impact what you can build and the final design of your project. What does this mean for generating alpha and finding an edge? Although it is still done in certain instances (see hotel and restaurant chains) scaling across locations is very difficult. This is a natural barrier to entry from larger, national companies and offers a great opportunity for any entrepreneurial individual/company that wants to dive in and understand a specific neighborhood or city to levels that most larger companies simply don’t have the time to cover.

  • Importance of relationships - although this is true for all asset classes and finding opportunities, given the hands on nature required as well as the complex process laid out above relationships are particularly important in real estate. There are so many parties involved (particularly in development) that coordination and communication are arguably the most important skills one can possess. What does this mean for generating alpha and finding an edge? This has been beat to death but it means your network is everything. Examples of strong relationships generating alpha include (but not limited to):

  • With buyers/brokers - ability to source deals before they are on market, knowledge of what deals typically transact for, inside information on the conditions/situation for certain properties

  • With bankers - ability to push pricing down, increase leverage, ability to work with you on guarantees, flexibility when you get in trouble when it comes to restructuring (all eventually have limits)

  • With city employees - willingness to advocate for you with outside neighborhood groups who may challenge your proposed project, willingness to waive certain design requirements or fees, willingness to push your project through or look at any modifications first, willingness to give you proactive feedback before any city council meetings or public hearings

  • With investors - ability to raise capital quickly to jump on market conditions or timing, more favorable pricing and leverage, willingness to work with you through challenges, willingness to help with debt based guarantees

  • With consultants - willingness to take “free” looks at new sites, willingness to provide feedback on preliminary design, ability to tease up big potential sign errors and quantify them, ability to use city relationships to push entitlements quicker

Again I only covered the three biggest factors but overall the biggest takeaway is that commercial real estate is a big and complex enough category that there are infinite ways to find your specific niche (whether that be property type, location, skill set, etc) and generate alpha no one else can capitalize on.

 

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