If you were a real estate professional in the 1970’s and spent the last 46 years asleep, you wouldn’t recognize the real estate business as it is today. Real estate used to be a local business where most of the buildings and valuable properties were owned by families. Personal relationships and asymmetries of information provided massive opportunities for smart real estate professionals who were “in the know”.
However, back then there was almost no transparency about rental or leasing activity, sales prices, who was getting loans and at what rates. The only way you knew that information was based on your own transactions. Since nobody knew what was going on there were two sources of opinion; what the information was and what to make of it. This made it challenging to accurately assess the quality of a particular transaction.
Additionally, there were very few sources of debt and equity. The lack of capital coupled with the capacity of the market and inefficient brokerage community meant there wasn’t much liquidity.
There’s this belief among the real estate community today that the efficiency of the market is eliminating opportunities for entrepreneurs. They hear stories of real estate professionals in the 1970’s buying core assets at incredibly cheap prices, however they fail to understand the challenges that existed in the market.
There are tons of opportunities for entrepreneurs today, just that the sources of those opportunities are changing. In order to understand the opportunities, I think it’s important to know the historical context of the rise of institutional capital and access to data which has completely altered the real estate landscape.
Rise of Institutional Capital
The rise of institutional money has changed everything. In 1974 the Employee Retirement Income Security Act (ERISA) said employers must set aside money and begin investing that money on behalf of future retirees. With each paycheck employers started setting aside a little piece. Now, 42 years later, there’s a massive pool of capital that needs to be invested (and a significant portion goes toward real estate). There are a few other sources of capital that increased the relevance of institutional money such as Sovereign Wealth Funds and defined contribution plans (401K’s). All this capital has made the real estate market significantly more liquid.
Access to Data
Today, there’s massive amount of information available at your fingertips; information about interest rates, whether you should fix or float, leasing transactions, sales transactions, and macroeconomic data. All this transparency has made the market more efficient. If you’re the entrepreneurial type who lives off the inefficiencies of the market, you’ll be forced into less major markets and less major assets. In these small fragmented markets, asymmetries of information still exist, however you’ll have to trade off liquidity.
I strongly believe the real estate business is better off and the evolution has created even more opportunities for creative entrepreneurs.
- Data: The availability of data allows entrepreneurs to identify opportunities that others may miss. Very few real estate companies today are making data-driven decisions. They’re still digging for information asymmetries and typically identify an opportunity through a personal relationship then confirm their investment thesis through research. Analytical real estate professionals can identify opportunities by researching macro trends and making bets on future growth. There is more data today than people know what to do with.
- Efficient Marketplaces: Real estate crowdfunding sites are going to establish efficient secondary markets for shares in properties. These marketplaces will solve one of the biggest downside of real estate investing; liquidity! We’re also seeing the emergence of online marketplaces for the purchase/sale of real estate. In the past a broker may have gotten your property in front of 15 potential buyers, 5 of which actually toured the asset. Today, most assets get in front of every potential buyer, creating a more liquid market for real estate.
- Internet: Creative entrepreneurs have always thrived in real estate. Those who embrace technology have the opportunity to create large trusted brands by utilizing the power of SEO, social media, email marketing, and a plethora of software products. Companies doing high quality real estate deals have the opportunity to scale that work and attract new investors through inbound marketing and harnessing the power of their existing network.
Just like real estate professionals of the 1970’s, if you’re a young person today, you likely won’t recognize the business in 46 years ahead.
Be part of the change rather than fighting it.