In the previous blog post we discussed Evaluating Environmental Threats in the commercial real estate industry to a smaller degree its impact on Acqudev. As I alluded to in the ending of the blog, the analysis of threats often leads to the analysis of opportunities which we will discuss in this post. Before we dive into commercial real estate specifics, I have provided the table used from the Strategy textbook to show how a firm may have the opportunity to neutralize certain threats in a broad context.
| Threats | Opportunities to Neutralize Threats |
| Entry | Erect barriers to entry by creating economies of scale, reduce costs independent of scale, and use government policy to deter the threat of new entry. |
| Rivalry | Compete on dimensions besides price such as cost leadership, product differentiation, cooperation’s, and diversification. |
| Substitutes | Improve product attractiveness compared to substitutes: Cost leadership, product differentiation, cooperation, and diversification. |
| Suppliers | Reduce supplier uniqueness: Backward vertical integration and development of second sources. |
| Buyers | Reduce buyer uniqueness: Forward vertical integration, product differentiation, and seeking additional customers. |
We will not drill down in each opportunity within each threat; however, I hope you can begin thinking of how you can neutralize your threats when beginning your career in commercial real estate. Acqudev is currently utilizing our opportunity to build a very lean development process, create relationships across the industry, build a reputation of the firm that puts doing the right thing the first time ahead of profits, creating relationships with engineers, brokers, architects, city officials, and state officials throughout Tennessee and Kentucky as a way to eventually neutralize possible threats as we grow.
Before we can drill into the opportunities in commercial real estate we must first identify the industry structure. Here is the deal, real estate as a whole is one of four “core” investment asset classes that also include stocks, bonds, and cash. According to the paper titled “Overview of the Commercial Real Estate Industry” by Ambrose and Lusht, the total market value of non government owned real estate was approximately $25 trillion in the mid 2000’s exceeding the stock market of $20 trillion. Here is what I was able to find through research on the size of the commercial real estate market.
For those who do not understand commercial real estate, in its simpliest form is any property owned to produce an income. Today, commercial real estate is valued around $6 trillion in the US and maked up around 25% of the entire real estate market. Within commercial real estate sits various classes such as:
- Retail includes all “brick and mortar” locations used for retail sales such as Walmart, CVS, Walgreens, and AT&T as well as restaurants, grocery stores, fast food, shopping centers, malls, strip malls, etc. I think you get the picture. Retail is valued around 36% of the commercial real estate market or $2.1 trillion.
- Office Space includes everything from your local accountant’s office to a new skyscraper in Nashville. Office space represents around 29% of the commercial real estate market and $1.7 trillion. Also, it is important to note that Retail and Office Space is where I am gaining the vast majority of my experience as a real estate development manager for a boutique development company.
- Hotels are self-explanatory and they make up around 32% or $1.9 trillion dollars of the commercial real estate industry.
- Apartment Buildings come in around 24% and $1.44 trillion of the commercial real estate industry.
- Industrial only accounts for 4% or $240 billion of the commercial real estate industry. There is actually a very large shortage in Nashville, TN at the moment of industrial real estate with around a 4.6% vacancy rate of available industrial space. In translation, 95.4% of all industrial real estate in Nashville is occupied.
Needless to say, the real estate industry plays a significant impact into the overall US economy. Now commercial real estate accounts for a much smaller portion; however, it plays a large role within the real estate market. Acqudev is aiming to fulfill the niche of commercial real estate development within the retail and office space markets that combined make 65% of the market.
So, what type of market is commercial real estate? I believe it is classified as a fragmented market meaning that there are a large number of small and medium sized firms that operate within the market. Sure, there are large companies within each sector; however, no one company dominates the entire commercial real estate market. Once reason this is considered a fragmented market is the low barrier to entry. Anyone who has access to sufficient capital can become a “developer” of some sort. Personally, I run into many situations where high earning doctors purchase land in hope of developing is for 20x’s what they paid.
The largest opportunity for firms in a fragmented industry is the ability to consolidate the industry into a smaller number of firms who are participating within the market. Once consolidated, firms can increase profit margins due to economies of scale or through different ownership structures. In commercial real estate, it is difficult to just consolidate due to the nature of real estate being local and the heavy focus on relationships, but by increasing the number of projects you give to your employees or suppliers and creating lowers costs structures leads to positive results.
Hopefully this helps give an idea of how threats can be turned into opportunities, while keeping your focus on the end prize.
Until next time,
Winston W. Parks