A Fragmented Mess of Opportunity

Ok, here’s a not-so-secret secret about commercial real estate investing, it’s a rather inefficient marketplace. As in, it’s almost a certainty that the price likely does not reflect all relevant information, the Econ 101/EMH sense of the word “efficiency”. It seems to get a little more efficient the bigger you go and then at the very top of the food chain (i.e. Blackstone) gets inefficient again, but generally speaking it’s far less efficient than almost any other market (at least as far as the largest asset classes go, I’m not going to sit here and tell you that it’s less efficient than trading MLPs because the hell do I know about the aftermarket for My Little Ponies).

You know how many publicly traded companies there are in the United States? Fewer than 4,000 companies, representing almost $20 trillion in market capitalization are traded on a major exchange. That’s fewer than existed in 1975 and almost half as many as in the mid 90s. Even if you add the OTC stocks you’re only getting to almost 20,000 buyable stocks.

Meanwhile, there are nearly 10,000 mutual funds all looking at the same opportunities.

You know how many commercial properties are in the United States? 5.6 million, representing nearly $10+ trillion of value.

https://www.eia.gov/consumption/commercial/reports/2012/buildstock/

Breaking this down to only the commercial buildings greater than 25,000 square feet and you’re still looking at almost 675,000 investable properties.

AND THE BEST PART?? There’s no exchange. There’s no prime broker, there’s no market maker, there’s no investment bank buying a building to hold on their books for resale. It’s end to end, over the counter, all day long. And you can imagine how many of those properties have to report their occupancy and rental rates to the SEC each quarter.

Aside from a select slice of CRE, properties are sold through an (occasionally qualified) intermediary, directed by a seller that is frequently distracted, disjointed or completely out to lunch. If you’re lucky, the property is sold directly by the owner to avoid the broker process and fees for the sake of expediency. Look, I’m not a shill for the brokerage industry but yeah I’m going to go out on a limb and say the best acquisitions come from those properties sold by terrible ownership groups without an investment sale adviser so maybe consider it (or don’t IDC).

For large dollar assets (given the more limited investor pool and sophisticated brokers), the process more often than not achieves the healthiest price. That’s the most efficient it gets. Of course, when everybody and their mother can raise money for and (thinks they can manage) a multifamily property, that feels efficient too, but perhaps that’s inefficiency in the wrong direction but nevertheless makes it too expensive for an investor actually weighing proper risk-reward tradeoffs.

But there are HUNDREDS OF THOUSANDS of properties that never get in front of the buyer who would be willing to pay the maximum price.

As far as starting points for invest-able asset classes go, I’m happy to start there.