Stop Buying Real Estate Before You Know Who Wants It

I've always thought one of the stranger habits in commercial real estate is how often investors evaluate the building before they evaluate the demand for the building.

The conversation usually starts with the property itself. What's the cap rate? How old is the roof? How many parking spaces are there? What's the rent roll? What are the comparable sales? All of those questions matter, but they are answering a question that comes later in the process. Before I care about how attractive a property looks on paper, I want to know whether tenants actually want to be there.

My approach is pretty simple: I only want to buy real estate where there is already demand, or where the market is clearly moving in that direction.

That sounds obvious until you look at how many investment decisions are made. An investor finds a building with an attractive price, decent physical characteristics, and what appears to be a reasonable projected return. The underwriting works, so they buy it. Then, when the existing tenant leaves or the property needs to be repositioned, they start asking the much harder question: who is actually going to lease this space?

That's when a good-looking investment can become a very different proposition.

A property can have a great cap rate because the market doesn't want what it's selling. Cheap real estate isn't necessarily undervalued real estate. Sometimes it's simply cheap because there isn't enough demand to support a higher price.

That's why I prefer to start on the other side of the equation.

Which tenants are expanding right now? Where are they opening locations? What size spaces are they looking for? Are they targeting specific demographics, traffic patterns, or trade areas? Most importantly, is there enough activity from multiple tenants to suggest that the demand isn't dependent on a single operator?

That last part is particularly important.

If I find a market where several unrelated tenants are looking for similar real estate, that's a much more interesting signal than one company announcing an expansion plan. It suggests that something broader is happening with the market rather than simply reflecting the strategy of one business. Maybe population is growing, maybe employment is diversifying, or maybe an established retail corridor is finally reaching the density that makes certain concepts viable.

Those are the markets I want to understand.

It also changes how I think about risk. If I buy a property because I like the building and then discover that there aren't many tenants interested in the location, I'm stuck trying to manufacture demand. If I start with evidence that tenants are already looking for space there, the property itself becomes a way to participate in that existing demand.

That doesn't make every deal a winner, of course. A strong market can't rescue terrible underwriting, and tenant demand doesn't excuse paying too much for an asset. There are still plenty of reasons to walk away from a property that looks good on paper.

But I would much rather begin with a market where tenants are already raising their hands.

This is one of the reasons I pay so much attention to the demand data we see through Sytes. Seeing where tenants are actively looking provides a different lens for evaluating real estate. Instead of starting with a building and trying to figure out who might want it, you can start with actual tenant requirements and work backward toward the properties and markets that could satisfy them.

Real estate investors have an enormous amount of information available to them today. The trick is knowing which information should come first.

For me, that starts with demand.

If tenants are telling me they want to be somewhere, I'm interested in understanding why. If they're not, I'm interested in understanding why not.

And if I can't find a convincing answer to either question, I'm probably not buying the building.