From a small northwestern observatory…

Finance and economics generally focused on real estate

Real Estate Marketing Focus

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I’ve observed over the years that real estate investors, developers, and such try to aim for the “middle”.  It’s a defensive strategy.  Lots of community shopping centers got built before the recession hit, not because they were hot or trendy or even hugely profitable, but because they were generally considered to be “safe”.  The same was true with single family subdivisions, all of which looked pretty much alike by 2006.  Lots of “average” apartments were built, Class B to B+ office buildings (some of which marketed themselves at Class A, but could get away with that only because of demand), and plain, vanilla warehouses were added to the real estate stock.

Now that we’re (hopefully!) coming out of a recession, it may be a good time to dust off some basic truths about business in general as it applies to real estate.  Sure, there’s a very strong temptation to rush to the middle again, and in the case of apartments (for which there is a demonstrably strong demand right now), that may not be a bad idea.  Nonetheless, I recall one of the great pieces of advice from Peters and Waterman’s In Search of Excellence: “average” firms achieve mediocre results.  The same is frequently true in real estate.

Case in point — there was a great article on page B1 of the Wall Street Journal yesterday titled “The Malaise Afflicting America’s Malls”. by WSJ’s Kris Hudson.  (There’s a link to the on-line version of the article on the WSJ Blog.)  Using Denver, Colorado, as an example, they note how the “high end” mall (Cherry Creek Shopping Center), with such tenants as Tiffany and Neiman Marcus is enjoying sales of $760/SF.  At the other end of the spectrum, Belmar and the Town Center at Aurora are suffering with $300/SF sales from lower-end tenants.  Other malls in Denver are shut-down or being demolished and redeveloped.  For SOME consumers and SOME kinds of products, in-person shopping is still the normal.  It’s hard to imagine buying a truck load of lumber from Home Depot on-line (and Home Depot has done very well the past few years), although even they have a well-functioning web presence for a variety of non-urgent, easily shipped items.

I noted recently that some private book sellers are actually doing well in this market, and have partnered with Amazon to have a global presence.  (We buy a LOT of books at Casa d’Kilpatrick, and nearly all of them come from private booksellers VIA Amazon’s web site.)  On the other hand, it’s hard to imagine buying couture fashion over the web.  Intriguingly, Blue Nile, the internet-based jeweler, notes that their web-sales sales last year (leading up to Christmas) were great at the both ends of the spectrum, but lousy in the middle.   Stores like Dollar General, who aim for a segment of the market below Wal Mart, have done quite well in this recession (the stock has nearly doubled in price in the past two years).  Ironically, Wal Mart, which is increasingly being viewed as a middle-market generalist retailer, hasn’t fared as well.  Target, which seems to aim for the middle of the middle of the middle, has seen it’s stock price flat as a pancake for the past two years, and Sears, the butt of so many Tim Allen jokes, is trading at about half of where it was two years ago.  These lessons are being lost on some retail developers, but being heeded by others.  Guess who will come out on top?

So, who needs offices, warehouses, and other commercial real estate?  Businesses at the top, middle, or bottom?  If we follow the adages of Peters and Waterman, we’ll expect the best growth — and hence the most sustained rents — at the top and bottom of the spectrum.  (Indeed, even in apartments, one might build a great case that the best demand today is at the low end and high end).  However, we’re willing to bet that developers will aim for the middle, as always.

One Response

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  1. i agree that your focus regarding realestate has to change. its essential. nice article http://homes-pittsburgh.com

    KJ

    March 12, 2012 at 7:51 am


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