Raising Capital in CRE: Standing Out in the Eyes of Investors
As a commercial real estate operator, you may get the impression that return above market, or alpha, is all that’s needed to capture an investor’s attention.
However, most savvy investors understand that every aspect of commercial real estate is unique, and no two properties, operators, or strategies are the same.
The alpha you achieved on a property in Florida versus the alpha a peer earned on an investment in Arizona is often difficult, if not impossible, to equate. There are too many unknown variables to justify an equivalent comparison.
Consequently, alpha is a weak selling point in raising capital.
If you can’t use alpha, how can you differentiate yourself?
Through speaking with thousands of owners and investing in dozens of deals, we’ve observed that the most successful real estate operators are the ones who prove themselves in the three critical areas that we’ll dig into in this article.
A clear vision
Successful real estate firms lean into their unique story and vision to attract investors.
However, many commercial real estate operators make the mistake of pitching themselves in the same way as the rest of the crowd.
Novice sponsors often will use similar words, models, and metrics as the competition. Their presentations are generic and only outline a specific deal or their overall investment thesis — saying next to nothing about their personal story, qualifications, and vision.
A cliché pitch won’t distinguish your project from the hundreds of other competitor’s presentations sitting on an investor’s desk.
As an entrepreneur and operator, YOU are the differentiating factor.
Therefore, the goal of your pitch is to convey how you’re doing things differently and why your approach is the best.
Cortland, a real estate group based in Atlanta, is an excellent example of how a clear vision can accelerate a firm’s growth. In 2015, Cortland had an idea: Challenge the standards of apartment living through innovation, technology, and best customer practices.
Merging this vision with their unique background, the company accomplished something unprecedented: growing from a decent 5,000 residential units to a mammoth 60,000 residential units within just five years.
In the process, Cortland built a $7.6 billion real estate portfolio and earned numerous innovation awards.
To experience similar rapid growth in today’s market, you need a strong vision that attracts investors.
Operational structures that support innovation
Firms with innovative organizational structures are most likely to raise capital successfully.
The current management structure of most commercial real estate operations is outdated. In a recent survey conducted by Deloitte, “more than 31% of RE respondents … made little to no progress in modernizing their HR processes, technology, and capabilities in the past 10 years.”
Today, the most successful real estate firms have modernized corporate structures, transformational company cultures, and new roles within their organization, such as:
- Vice President of Talent Engagement.
- Executive Vice President of Capital Markets.
- Building Automation and Technology Manager.
- Resident Experience Manager.
- Vision Information Engagement.
- Marketing Automation Specialist.
- Business Intelligence Solutions.
Because COVID-19 compelled CRE to go digital, roles reflective of technology, vision, and innovation are critical to staying competitive and taking a tech-informed perspective of the market.
Putting your data to work
The third critical way real estate operators can differentiate themselves from competitors is by applying a unique approach to data.
The firms that stand out to investors are those who adopt an inquisitive point of view in their day-to-day operations. They have tailored strategies for evaluating properties, investment strategies, horizons, and resident engagement.
But while every real estate operator collects massive amounts of data they could use to streamline processes and inform strategic decisions, not every owner leverages that data equally.
Indeed, without robust data and analytics capabilities, you will blend in with your competition and struggle to secure equity.
A 2019 report by NAIOP highlights the slow adoption: “60 percent of [real estate] executives said their firms still use spreadsheets instead of software as their primary tool for reporting.”
Because many firms are working with data traditionally, the operators that incorporate software, artificial intelligence, machine learning, and automation are in the best position to outperform their peers.
Unfortunately, there’s much misinformation about the cost of transitioning to a data-driven model. Many firms assume modernizing their systems requires hiring six-figure data scientists and engineers.
But this is not the case. A full-time, Google-level data scientist is only warranted when dealing with massive amounts of data on the scale of an international airport during the holidays.
The data most real estate firms generate isn’t enough to necessitate a huge outlay on data engineers.
Additionally, because Python, BI tools, and data processing are emerging skills among young talent, there is an opportunity to hire in-house data analysts at a fraction of the perceived cost.
The new recipe for CRE success
In commercial real estate, operators will always outnumber investors, resulting in a straightforward demand-supply dynamic.
The heightened competition to acquire funds makes it crucial for real estate firms to differentiate themselves from peers. And because COVID-19 disrupted the industry, investors no longer emphasize alpha in their due diligence.
Today, real estate firms with a clear vision, an innovative structure, and data management and analytical capabilities have the best chance to capture investor attention.