Middle market deals ($5 to $50mm) are the ideal acquisitions targets for commercial real estate investors seeking to generate superior risk adjusted returns. Superior not only to other commercial real estate assets, but to all other investment opportunities in general in my opinion.
Why middle market assets?
The middle market sits in a perfect “white space” or focus void. This deal flow is too small for the institutional investor, below $50 million, and too large for the one off individual investor, above $5 million.
On the lower end, there are untold amounts of investors with cash who can successfully fix and flip houses. The competition and the amount of people I see attracted to the space is staggering. More competition means one thing:
If the middle market deal flow I am talking about had the same attention as the foreclosure and fix and flip market it would be much harder to be successful.
When you step up to the $5 million threshold, you not only knock out the residential investors, but you also step into a territory where individuals, even many wealthy individuals who invest in commercial real estate, do not have the ability to CONSISTENTLY buy assets. So by stepping into this $5mm+,preferably $10mm+ dollar space, the buyer’s pool is significantly smaller.
Next you have the other end of the spectrum, below $50 mm. For large institutions, many times it does not move the needle to acquire properties at less than certain price points. For large REITs and other institutions, their cost of capital, is significantly less than non-publicly traded investors. These institutions are looking for what’s known as “institutional” real estate assets. Typically these trade at very low cap rates, and are palatable to the REITS, because their cost of capital is low.
Middle market, and deals in excess of $50mm have economies of scale that you just can’t find with smaller properties. The expense ratios of standard expenses to gross income always seem to make more sense when you look at larger deals than with the smaller ones.
Additionally, cap rates typically don’t compress like they do with the $50mm+deals when you step up from small commercial assets to middle market assets.
This is why the middle market is the superior space to operate in:
Less Competition From an Endless Amount of Individual Investors
Less Competition From Mega, Publicly Traded Institutions With A Much Lower Cost of Capital
Great Economies of Scale When It Comes To Expenses
Higher Cap Rates Across The Board Compared To Larger Institutional Deals.