The key to success in real estate investing (and business) isn’t simply finding a competitive advantage, it’s having a sustainable advantage that others are unable to replicate. Warren Buffet popularized the term economic moat, which refers to a “business’s ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms.”
As real estate becomes more institutionalized, the typical competitive advantages are arbitraged away; Informational advantages, even in secondary and tertiary markets, are not sustainable. Local relationships and knowledge are more difficult to replicate, but still not impossible.
At Atlas, we spend a lot of time thinking about moat. After all, our strategy and capital allocation each serve to strengthen our moat. We believe we have several competitive advantages that are sustainable and act as our moat.
Ability to Adjust Faster than the Competition
When owning and operating real estate, you must recognize there are no sunk costs (ignore sunk costs). If something isn’t working, be willing to switch gears and try something new quickly. This nimbleness is what enables us to compete with institutional companies who possess more bandwidth, have access to cheaper capital, and have a big respected brand name.
We’re constantly testing things and switching gears to adhere to the demands of the market. If a 3rd party property management company or leasing team is underperforming, we make a switch. If a marketing outlet isn’t generating a strong return-on-cost, we nix it. And if the market is dictating a new investment strategy, we change course.
To use an example, we own a single-tenant office building in a primary market. The credit-quality tenant has occupied the building long-term, however, a recent corporate realignment has created some long-term uncertainty. Although their lease doesn’t expire for over a year and we expect them to ultimately renew, we’ve fully vetted a conversion to a co-working space, with the goal of creating the most optionality for us as possible. While the easy thing to do would be to work with the tenant with the hope they renew, but by willing to adjust course and change our investment strategy, we create negotiating leverage and the potential to increase the NOI and building value through a new use.
Our flat structure and lean team make it easy to adjust quickly, but it’s our culture that encourages us to ignore sunk costs and focus on what’s working.
Better Communication with our Investors
Business edges can be found at the intersection of trust and simplicity. At Atlas, we syndicate deals to our network of 400+ (and growing) investors. The investors are the lifeblood of our company and we do everything we can to establish trust and ensure they have a great investor experience. That begins with the performance of our assets, but extends far beyond the deals to investor reporting and communication. Our goal is to provide investors with an 11-star experience.
Willingness to Test things and Fail
Real estate operators must have an appetite for being wrong. The key is having a structure that allows you to be wrong, with limited downside. Accepting lots of small failures is the only way to guarantee you’ll uncover a few things that end up being game-changing successes.
At Atlas, we’re constantly testing new technologies and tools that could give us a leg up on the competition; we were early to use real estate crowdfunding, doing RealCrowd’s 2nd and 3rd offerings ever. We did the first ever crowdfunded deal in Florida through Fundrise and we were an early customer to Juniper Square, an incredible investor management software.
On the multifamily side, we’ve utilized several tech tools such as RedIQ and Rentlytics, rent optimization software’s, data sources, and paid demographic research which provided insights which ended up being critical to the success of the deals.
We’ve created a company that values creativity and is willing to be wrong, knowing that the downside is limited and the upside huge.
The Ability to Wait Longer than the Competition
Although we typically underwrite a 10-year hold, we have the ability and the desire to hold many of our assets forever. If we think the market is overly frothy, we may sell. If the capital markets move in our favor and we believe there is future upside, we may refinance. If the deal is performing well, it’s fully levered, and the market isn’t overheated, we’re content to stay the course. We’re strong believers that real estate investing is best over the long-term with our structure, we’re able and incentivized to hold investments long-term.
It’s amazing how much of a competitive advantage can be found by simply having the disposition to wait longer than your competitors. Time eliminates the wild swings in the market valuation for assets which can kill returns. We can wait 10-20 years, while many of our competitors have to exit in 5-7 (or less).
The structural characteristics of our firm insulate us from the competition and provide sustainable competitive advantages that act as our moat.
What’s your moat?