Why RE Return Expectations Must Decline

Navigating Thin Margins in Today’s Real Estate Market

In the past 10 years, the landscape of real estate investment has undergone a seismic shift, driven by technological advancements that are reshaping traditional practices and strategies.?

?40 years ago, when I was just starting out on Wall Street as a floor trader on the Chicago Board of Trade, and later the New York Futures Exchange, there was an entire industry of clerks, floor traders, clearing firms, and support staff that allowed for trades to be done by retail as well as institutional investors. Back then, access to information was cumbersome and inefficient, which translated into pricing arbitrage opportunities. Today that entire industry is gone.

And just as Wall Street transformed with the rise of computerization, the real estate sector is now experiencing a similar evolution that is driving down margins and making opportunistic returns harder to find.??

?Following the unprecedented barrage of rate hikes over the past few years, coupled with the increasing efficiency of market data and technology, the heathy return expectations we all benefited from in the past 20 years – driven by historically low capital cost and a surge of liquidity – have largely evaporated. Current return expectations have not adjusted to reflect the reality of unprecedented efficiency at the same time the cost of capital has risen.

Thin Margins and the Wall Street Analogy

Real estate investment as an industry is slow to adjust, and as a result will be disrupted, just as algorithms revolutionized stock trading and reduced profit margins on Wall Street years ago. Technology is challenging an already cost-inefficient market that is heavy in the middle and will require longer-term investors to adapt to slimmer margin expectations to reflect this reality; until then, the bid ask spread on almost every transaction will remain wide.?

Investors must prioritize thematic investments and look past the cycle; investing in universal themes for growth based on demand and supply imbalances rather than short-term risk-adjusted returns. Investing more around ethics, transparency, and responsible practices to build sustainable strategies in sectors where demand is strong. Sustainability should guide investment decisions, balancing short-term gains with sustainable growth strategies that align with societal and environmental goals.

In short, the technological disruption in real estate investment mirrors the changes witnessed on Wall Street with the advent of computers, ushering in a new era of efficiency, competition, and thinner margins. By taking a longer-term thematic view of the market, leveraging technology, and prioritizing ethics and sustainability, investors can navigate this evolving landscape and capitalize on the opportunities it presents. Embracing innovation while staying true to core values will be essential in shaping the future of real estate investment in this new age of the market in my opinion.

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