Power Niche Marketing: The Second (Marketing) Threebie – A Very Simple One

In my last article, I explained that when I need to remind myself of the most important basic marketing things to do, I am mindful of the three basic items, which I call the “Threebies.” I previously discussed the first Threebie, which is to “Get Out and About!”  In this article, I will talk about the second Threebie.

The second Threebie is very simple:  Be Enthusiastic!

Yes, just that. Be enthusiastic! That is all I am advocating here. So far these Threebies are pretty easy, aren’t they?  Just get out and about and be enthusiastic. Anyone could do that, couldn’t they?

I can tell you this — no one wants a sad sack around. Or someone that just drones on and on. Have you ever been to a party or a group setting or just gone out to lunch with friends or co-workers? Who is the guy you just don’t want to sit next to or hang out with?  Of course there are a fair number of undesirable personal traits that people could have, but someone dull and droning and boring and negative is hardly going to get you to think: “Boy, I want to talk with that guy.”

On the other hand, enthusiastic people are such a thrill. Even if the person you are with is just talking about Band Camp, the fact that he loves it beyond imagination makes people pay attention and find that person exciting and interesting, maybe to your surprise.

This second Threebie – Be Enthusiastic! – is straight out of the Dale Carnegie course I took. It is discussed in the book How to Win Friends and Influence People (affiliate link), but they recognized its importance and built an entire course around this seemingly simple concept, in order to help people… well, win friends and influence people.

Let’s make time for a dorky drill here that I learned from the Dale Carnegie course. I use this often if I have a big meeting or a big pitch or I am attending something where I am on stage or have to make a strong, and good, impression on someone. It could even be an internal meeting at my law firm.

I, together with my colleagues that are going to the pitch or the meeting, repeat this five times, out loud and not whispering either:

If I act enthusiastic, I will be enthusiastic 
If I act enthusiastic, I will be enthusiastic 
If I act enthusiastic, I will be enthusiastic 
If I act enthusiastic, I will be enthusiastic 
If I act enthusiastic, I will be enthusiastic

Go ahead and try this yourself now. And don’t whisper either, say it out loud, and say it five times in a row. Okay, you feel like an idiot, right?

Now, for extra credit, find someone nearby and get him or her to do it with you. I bet you are laughing at each other for being so foolish.

However, is your mood different than it was before you did this exercise?  The answer is: “Of course!”  It is just about impossible to do this drill without your mood going from whatever it was to a higher, and more enthusiastic, plane. It is just about impossible.

As stated, my partners and I do it. We start laughing at ourselves – at what idiots we are making of ourselves, but by the time we are done we are jolly and happy and loose and smiling and in the greatest of moods and – almost always – our meeting goes just great.

Go ahead and try it before you go out and about.

Back to my main point, which is about the importance of being enthusiastic.  Sometimes people say you should just be yourself and, of course, that is true in part.  You can’t fake who you are. But if you are naturally dull, boring, uninteresting and unenthusiastic, then it is time to do something about it. I bet your entire life will get a lot better.

In this regard, a woman named Amy Cuddy has an incredible TED Talk called “Fake it Till You Make it.” This is well worth watching, as she gives one of the most inspirational speeches I have ever heard. She talks about “power poses” and other ways to rev up your enthusiasm. The point here is that even if you feel plain old stupid on this concept, if you “fake” being enthusiastic enough times, it will just happen that you will in fact become enthusiastic. That is what that silly drill above is doing; it is tricking your mind into uplifting your mood.

Even in your writing and your emails and text messages this can resonate. Consider how I am writing this article. Can you feel my passion and excitement – and enthusiasm – literally flowing through the words I am writing right to your cerebral cortex?  Sure you can feel it – I know you can!

I am a naturally enthusiastic person, so for me the Dale Carnegie course was like throwing gasoline on a flame. It encouraged me to go even further with that type of thinking and acting.

I urge you to do the same.

Stay tuned for the third and final Threebie in my next article…..

Power Niche Marketing: 6 Things Not To Do

Here are some things that are almost certainly a waste of time. I think, to my embarrassment, I have done most or all of these things myself. Mostly they makes me cringe….. Since it is a lengthy list, I have split them into two parts. Part one is below.

  1. Trying to take someone to lunch without an agenda that makes it clear that the lunch is for the other person’s benefit.

In this situation, the other person will assume you are trying to just get business out of them, and they will cleverly and creatively avoid it for a loooooonnnnngggg time.

I wonder how many of you readers are – right now – chasing some poor prospective client down for lunch? And if so, how many times has it been cancelled? And at the last minute at that, I bet, which is kind of demeaning to you? And afterwards I bet you chased after the person to reschedule. And each time it gets rescheduled, is it weeks, or even months, till the reschedule date? And what is your plan for that lunch – to talk about the poor fellow’s kids and skiing and then (subtly) slip in something about getting his business, which is supposedly the point of it all?

Bottom line, you are thinking of what you want and not what your client wants.

  1. Making up a super-convincing PowerPoint to show people.

Unless it is really funny or funky or crazy or iconic or a dramatic visual presentation, it will just put people to sleep. They will do anything to get out of watching it or if you force them to watch it they will not pay attention, or even if they do politely force themselves to pay attention, they simply will not remember it.

Do you really think your analysis of your market share versus that of your competition is going to “make the sale”? I ask you, when was the last time someone sold something to you, and why did you buy it?

By the way, here is a super-sales story, and it happened only a few weeks ago. The doorbell rang and a traveling saleswoman showed up. Can you imagine how she made the sale to me, and I had no chance against her tactics?

Well, she was about seven years old, cute as a button, and was with her Mom. They lived down the street and she was selling Girl Scout cookies. She just said “….do you want to buy some girl scout cookies?” I hate most Girl Scout cookies, and the rest make me fat, so I bought only ten boxes.

Boy was this a devastating sales technique. I wonder what would have happened if she had brought a PowerPoint…

  1. Misusing the internet and the social networks.

Some people seem to think if they press the right button on the internet or on social media, the business will just roll in. This is not going to be the case if the use of these tools is in place of personal interactions.

At least I certainly haven’t found a way to do this in a professional service business, nor have I seen anyone else do this successfully. The internet can be used for generating leads and letting people know your brand. However, sitting in your office and playing on social networks just won’t get the job done.

By the way, a caution here about what I mean is in order. I don’t mean you can’t email people and build pre-existing relationships by putting forth positive statements about yourself and your Power Niche on the internet. Of course you can and should. What I mean is that you shouldn’t be using the internet instead of personal contact. There is nothing more powerful than meeting someone in person, shaking hands, and sharing a cup of coffee or a meal. That is a predicate to a “relationship.” A supposed relationship built over the internet is not much different from an email relationship with that fake Nigerian Prince.

  1. A party where you invite all your clients/customers so they can network, etc.

This can feed your ego, if the party has “all the cool people there,” but doesn’t get the job done nearly as well as sitting down with people and talking about “their” business and how you can help build it. It is also a lot of time and money that could be spent better elsewhere.

  1. Networking without a plan or a message.

Networking without a plan is a lot better than doing nothing, as I will point out in later columns, but not that much better. It is a variant of working “hard” but not working “smart.” If you couple the hard work you are willing to put into your networking with the smart ideas you will learn from my column, then you will convert this to a winning strategy.

  1. Conventional PR.

After flip-flopping on this a half-dozen times in the past ten years, I have concluded that, for most of us, and for most businesses, this is just about a complete waste of time. Typically PR sops up the personal time of the most senior, and most valuable, persons in your company, as that is who the media wants a quote from.

You might spend hours to get yourself quoted somewhere? So what? Are you really going to get hired as a lawyer because you got quoted in the newspaper? Hardly.

Sorry, but all of this is almost always a complete waste of time, not to mention a waste of the money you spend on a PR Firm.

You are better off taking the time and the money that you would have devoted to PR and using it on the other techniques I outline for you.

Having said this, PR can be good for a global law firm to maintain its global branded position as one of the top players in the legal world. But down in the trenches, for most of us with smaller-sized law firms, it isn’t likely to help your business succeed or help you become a great rainmaker.

. . . .

If you have been doing any or all of the foregoing things, don’t bum out too much. I think I did every one of them, other than the social media stuff. The past is irrelevant – all that matters is what will happen going forward.

By the way, if you have done some of the foregoing and it has actually worked for you, consider why that is the case. Is it pure luck, in which event it is great that you were lucky but you still shouldn’t waste more time on it? Or, do you maybe have a special angle on the foregoing that I personally haven’t seen but is nonetheless successful that could be exploited? I don’t like to admit it – but I don’t (yet) know everything…

Power Niche Marketing: Always Start With Peter Drucker

In this column I have staked my marketing reputation on the theme and theory that marketing is (almost) all about creating, owning and building Power Niches. Last week, I outlined what a Power Niche is – and that definition is found at the end of this article so everyone remembers it, without having to go back to my first article.

In order to move forward and establish the intellectual basis for Power Niches, I start with Peter Drucker. Indeed, he is always a great place to start in the business world. He is one of my intellectual heroes. He was not only incredibly smart; he was also someone who took the time to figure things out and put workable and usable theories together. Drucker, if you don’t know, actually invented the science of “management.” He died a few years ago. If you want to be a real thinker in the business world – or the marketing world – I urge you to read his work.

Anyway, Drucker says that there are two things which every business must do to be successful. If the business doesn’t do those things, the odds of success are not good, and the converse. Can you figure out what they are? Don’t worry, I couldn’t either, but as soon as Drucker told me it was so obvious I was kicking myself. The two things are as follows:

  • To innovate
  • To market

Of course! If you don’t “innovate,” you have nothing to sell, and if you don’t “market,” then no one will realize why they should want your product in the first place. But if you put them together, then you have something powerful.

Consider Apple. What would Jobs have done without Wozniak? What would he have had to sell? And what would what Wozniak have done without Jobs? He would have tinkered around until someone stole his ideas or maybe he would just have gotten a job somewhere. If you put the two together; however, you have Apple, which is arguably the most successful company in world history.

So, although I would like to “just” talk about marketing in this column, it is hard to extricate marketing from innovating. If your law firm just does widget-like legal work that is indistinguishable from the legal work of other law firms, you have a serious problem. I will talk about how to solve problems like this in later columns; however, the first step in a successful marketing plan, and in building a Power Niche, has to be some level of innovation.

Let’s look at another very powerful, and indeed in my view the most powerful, thing Drucker ever said, which is when he identified a key and basic question; namely, what is the purpose of a business?

Don’t worry if you can’t get this one either. I couldn’t get it, and I suspect it took Drucker many years himself to figure it out. I was thinking it was probably to serve your customers, to serve your employees, to make the world a better place, to just make money; however, none of that is right. The purpose of a business, according to Drucker, is:

“To create a customer”

Wow! Makes you tingle a bit, doesn’t it? It is the use of the word “create.” He doesn’t say your purpose is to “get” customers or to “sell” to them or to “market” to them. It is to “create” them.

This goes back to the basic idea that you have to do some innovating if you want to market and sell effectively. Synthesizing Drucker, the ultimate plan as I see it is as follows:

Innovate and market to create customers

Steve Jobs said this beautifully when he said “don’t ask the customer what it wants; instead, show the customer what it should want.”

Or in another way, “it is not the customer’s job to know what they should want.”

The point here – as both Drucker and Jobs are saying to us – is to

Innovate and market to create customers”

Please consider this for a few minutes and take a moment to think how it applies to your law practice. Are you just “practicing law,” or are you innovating and marketing to “create” customers?

I used to just be a plain old lawyer, and my career went absolutely nowhere. Now I spend every single day thinking about how to “create” customers – just like Steve Jobs said above – and my career is quite successful. And to be clear, I “really” do this. The purpose of these columns is to teach you exactly how I do it.

This is the first lesson. You have two weeks until my next column. Your homework is to read what I wrote (above). Reread it a couple of times. And think!!! How can you “innovate and market to ‘create’ customers”? You might just be flailing around now and maybe even have no clue what I am talking about. But if you read what the Power Niche is (below) and just turn on your brain, I assure you that your time will not be wasted.

Here is the definition of Power Niche again:

In brief, a Power Niche is a small-sized niche within a bigger industry that no one else yet dominates or owns. The niche isn’t obvious so you have to figure it out and “create” it. You step in and learn everything about it and everyone in it. You tell everyone about what you are doing – incessantly – and become the real “owner” of the niche merely by staking out your homestead in virgin territory. This then becomes a virtuous cycle as the more you know, the more you do, and the more you do, the more you know. Before long you are the world’s unquestioned expert in this (smaller) niche. All of this enhances your bargaining power within that niche. Instead of begging for business in the bigger industry, you now have eager clients paying you top dollar within this smaller Power Niche.

The End Game for Co-Working

I have been watching – and our firm has been participating in – the co-working trend.  It started with Regus when it was founded in 1989 but didn’t really go anywhere until the past few years.  Since then, numerous players have entered the market, each with its own twist to appeal to different parties.

There is an ongoing debate as to what will happen during the next downturn.  Some say that the co-working spaces – filled with millennials – will become ghost towns as these millennials will go home to work out of their parents’ basements for free.  Others say that in a downturn, co-working will boom even more because there will be more people out of work.

I am not wading into this debate except to say that I am certain that no one has a crystal ball and we will just have to see what happens at the time of the next downturn.  If I had to guess – and I shouldn’t guess publicly – I think the latter (i.e. the boom) is much more likely than the bust, but that is just my guess.  However, I do have a perspective here that I think is interesting….

To take you through my thinking, I hearken back to the internet.  When it started, everyone was so excited.  It was a “new business” and everyone was pouring into it.  However, it turned out that it was really not “a new business”; instead, it was “a new way of doing business.”  This meant that WalMart could be in the business just as easily as an internet start-up.  If you fast-forward about twenty years, I don’t think there is a single business that exists today that is truly an “internet business”, with the single exception of Amazon and, at least according to my calculations, it is only just now starting to turn a profit.   So much for the “internet business”.

I think the exact same analysis applies to co-working.  If you look at what is happening now, there are numerous competitors; however, recently, landlords themselves have started to enter the fray.  For example, if you own an office building, you might consider allocating a floor for co-working space.  The margins are dramatically higher than what you would get if you leased the floor – versus the risk that your tenants are sort of like hotel guests and could evaporate if the market changes.

To be clear here, since co-working is so labor and operationally intensive, most landlords will team up with a co-working provider.  I think you will see a lot more of this.

As a landlord you wouldn’t want to risk the entire building on this concept just yet and even if you did your lender wouldn’t let you, but for a single floor it probably makes sense to take a chance and enjoy the upside without that much downside risk.  And ten years from now, once co-working has proven to be a longer-lasting concept, your lender will probably let you co-work out half of your building or even more than that, i.e. co-working will likely morph to be more like a hotel concept.

In any case, over the next ten years I suspect co-working will become more and more ubiquitous.  Then what happens to the co-working companies?

My prediction is that there will be a couple of survivors.  The rest will fold or be absorbed or bought by other real estate players.

Meanwhile, I advocate that real estate players – worldwide – should be looking at how they can optimally apply this “new way of doing business.”

Brexit and London and Talent, Oh My!

I am sitting here in New York reading goodness knows how many articles on the Brexit. It is getting more coverage than any other news right now.

I recognize it is juicy for the media because there are all sorts of thought-provoking issues that touch on how human beings can live together (or maybe not live together) – but I have another take on this that I haven’t seen in other articles so I will share it. My thoughts also lead into a possible twist on real estate investing as well.

Let’s start with London. People are wondering understandably what will happen to London. It appears that some parties want to pull their money out; hence, various London based investment funds are (temporarily) closed to withdrawals. Other articles indicate a concern that the EU will make it rough on London and/or the informal financial center of Europe will move away from London. There is a concern that London may be in trouble.

I know I shouldn’t make a prediction about the future – indeed, that was the point of my last article – but here goes anyway. I predict that:

London will be just fine! 

There I said it. I sure hope that either (i) I am right or (ii) if I am wrong no one remembers I made this prediction,

Here is my thinking…

About eight years ago – at the end of 2008 – there were many who thought it was lights out for New York. The thinking was that the banks and investment banks and funds were falling apart, there were no bonuses for the people who worked at them, people would give up, the financial center would shrink down and die and possibly the center of the US world would move to DC or another location.

At this time I made a speech to my law firm about this issue. My speech had a central theme that NYC would be just fine. My reason was simple – it was that New York City has a special magic to it that makes the key ingredient – the talented people – stick around. Even though everything financial was crashing, my thesis was that the people that think of and effectuate complex real estate and corporate financial transactions wouldn’t “want” to leave. They would “want” to stay in New York and if they did in fact stick around they would create the next upside.

That is “exactly” what happened. The talent stayed and New York is stronger than ever before.

I see the same thing here with London.

I have only been to London once and I haven’t traveled much – so I admittedly am taking a bit of a leap here – but from what I know, London is a very special place. It is a melting pot of humanity. It is a vibrant and powerful city that has a special magic to it. When you get right down to it, I don’t see the talent “wanting” to leave – uprooting their families to go where, exactly? There are other great cities in Europe for sure, but if your life is in London, I don’t see people eager to move somewhere else so easily. If you live in London and have family and business contacts there, your optimal first strategy is to figure out if there is a way to stick around.

And if the talented people that form the backbone of London’s financial expertise don’t actually leave then I am confident that everything will be just fine in the end for London. That talent will create the next upside, just as occurred in New York.

Also, London has other significant features compared to the rest of Europe: The language in London is English (or some variation of it) and the language of global business is also English. This is a significant built-in advantage for a global financial center. And, London is a common law system with a well-developed and understood legal tradition and landscape that is far easier to navigate through compared to any other jurisdiction in the remaining EU.

Now I will philosophize a bit and wonder if this is a theme for a modest twist on real estate investing; namely, to follow the talent?

Consider this for the real estate world, i.e. evaluate where to invest based on whether the location is attracting and retaining talent — or not.

Currently, real estate investors look at population growth and jobs growth, which of course makes a ton of sense – however, I haven’t seen people look at “talent growth” or “talent flight” for purposes of real estate investing. Perhaps this is worth considering.

And I do hope I am right about London. . . . . .



What “Inning” of the Real Estate Cycle Are We In?

I have now practiced real estate law for almost 35 years, which is a long time to do anything. I am not absolutely “sure” about many things; however, I am confident that no one has a crystal ball about what the markets are going to do.

Some real estate people seem to be so doggone smart. They sell before the market crashes. Then they buy low at the bottom. These people are revered as the smartest names in real estate. They go to conferences and speak at them. They are usually great speakers because they are smart – rich – and self-confident. After all, they pulled it off.

Often they talk about what “inning” of a cycle we are in. If not, the moderator usually asks that question. Those in the audience are busy taking notes like:

“Toby Jones thinks we are in the third inning [of a certain real estate product]”

Perhaps that makes the party taking notes, who has invested in a similar real estate product, “feel” a little better – and after all there are all sorts of articles written about our human emotional need for validation, etc.

However, the truth is that neither Toby Jones nor anyone has a clue what inning we are in. Toby talking about innings and you listening is as useful for investment decisions as going birdwatching.

But, you might ask, what about the fact that Toby Jones has been right for the last three downturns? He always seems to know when to get in and when to get out. However, if you really dig in, I wonder:

Is Toby really right that consistently? Did he really get in and out at the right times to begin with? If you look at a longer time period, was Toby right over a long time period or just the past few times? Did he get in a bit too early and maybe got out way too early? Did he miss a lot of upside and get hit with a decent amount of downside? Did he make almost all of his upside on one dramatically-outperforming transaction?

Did Toby make a lot of predictions and take a lot of actions that were proved completely wrong but no one really remembers that? For example, was Toby sure that interest rates are going up next year for the past seven years? If you are Toby Jones reading this, was that your prediction? Now, almost no one thinks interest rates will go up next year. What does that mean?

And, even if Toby has a great track record over a long time of, say, 30 years, even then it doesn’t necessarily mean Toby is really smarter or has a crystal ball. If there are thousands of real estate players (all dumb as a post) and all making recommendations and decisions over 30 years, it is a statistical certainty that some will be right just about all of the time during that time period.

Let me apply this to New York City (since I am based here). Pricing of most real estate assets here is exceptionally high, say most of the Toby Jones’s, which would lead one to conclude that buying now is a mistake and prices have nowhere to go but down. Indeed, sitting here in NYC, to me it “feels” like a significant correction is starting right now. Maybe prices will be down 50% in the next few years.

However, New York is the financial center of the world – a booming tech center – a cultural center – a diverse melting pot – an exciting and vibrant city – and a place where when you get right down to it, talented people want to go to and stay. It is one of only a few markets in the world in a stable democracy that is large enough to put down an enormous investment that will likely always have liquidity. There is every reason to expect that the flight of worldwide capital will continue and if so what better place than New York City. And with interest rates going to zero, or even negative, around the world, maybe a 3% cap rate in New York City is just fine. Maybe prices will double in the next five years?

The only thing I am sure about is that I don’t know. And I am also sure that no one else – including Toby Jones — knows either. Indeed, I would guess that there is “smart money” that has been waiting for a correction in New York City pricing of real estate for several years now and the only thing the smart money has achieved is that it has so far missed out on a lot of upside.

But maybe now there will indeed be a “correction” and the “smart money” will “pounce”! To that I say “fiddlesticks!”

For that to be true the smart money would have to know that the correction will be 13.5% rather than 35% and know when the bottom is and I don’t buy that the smart money will know that. How much “smart money” was there at the depths of the financial crisis when prices were down 35% in New York? Precious little – probably because the smart money thought prices were going to drop a lot further. It took quite a while before many would dip their toes in the market. And, yes, those who bought at the bottom look awfully intelligent, but what would have happened if the financial crisis had gotten worse or New York became victimized by more terror attacks or crime had gotten worse or a health panic had occurred or all sorts of things had happened?

I could go on here, but my point is simple; namely, that it is a waste of time making macro predictions about markets that no one can really be sure about. You may get lucky for a while, but sooner or later you will get tagged and I predict you will under-perform over a long-term time period.

Warren Buffet makes this point all of the time. He says he cannot predict the market, and no one can, so it is pointless to try. Instead, he looks for companies that are good value and uses his intellect to buy at good prices.

So, I will stick my neck out and say that if your company’s real estate strategy is based on timing the real estate market – and predicting what “inning” of a cycle we are in – then it is likely a flawed strategy that may work for a while but eventually will be upended with below average long-term returns.

So – enough negativity – what do I advocate? I advocate being market-agnostic and thinking through the best ways to “create value” in real estate (and maybe even looking at my prior – and future — articles on that subject). Just go about your business looking to create value and finding deals that do so. Sometimes the market will go up, and that will juice your returns to the upside. And sometimes the market will go down and your returns on that deal will be lower than you like. However, in the long run, if you follow this strategy, you will outperform.

Uniqueness – The Bane of Fundraising

I have seen this time and again. Someone uses their brainpower to come up with a cutting-edge idea for real estate investment. It is a niche (a “Power Niche” as I call it), or a way of looking at real estate that no one has done before. It seems pretty cool, but the lament is that “investors won’t go for it”, so, alas it is just not viable.

If the fundraiser doesn’t just throw in the towel at this point, the next question is whether the fundraiser should “tweak” the business model (or maybe in other words ruin the cool and cutting-edge part of it) so it will look like other investments and thereby become appealing to the target investors; or stick to his guns and try to find investors, even though most prospective investors will not be willing to take the plunge. That sounds kind of terrible too – like the sheepherder throwing in the towel and just deciding to follow the sheep.

As an aside, I don’t mean to imply that the investors who reject the new ideas are foolish. They are not dumb at all. Indeed, the prospective investors are smart to avoid the newfangled investment idea for the simple reason that if they all stick together and perform in an “average” manner, they will remain employed and their lives will continue on (probably happily) as they were before. If, however, they take on the risk of the new idea (and all new ideas have enhanced risk as well as enhanced reward), and it goes poorly, they may be out of a job.

I had been noticing and thinking of this irony – or paradox – for years, but then Todd Zenger wrote a really interesting article in The Harvard Business Review called The Uniqueness Challenge, which explains this conundrum in a very readable and understandable manner. He calls it the “Uniqueness Challenge” and that does describe it very well, as it is always a “challenge” to be “unique”.

I note that my law firm took this Uniqueness Challenge by making the determination to be The Pure Play in Real Estate Law®, thereby taking the enormous downside risk of being different (and unique). We “burned the ships” with this strategy and, fortunately, it worked out exceptionally well. At the time we did it, we were very nervous about it, but now looking at where we stand in the marketplace it seems so obvious – what were we worrying about?

So hats off to Mr. Zenger for his article – it is well worth reading.

Now we have this conundrum—this irony—this paradox. The question is how to solve it. Here is my best shot at it:

At the outset, I wouldn’t tweak (i.e. ruin) the business idea to appeal to investors. That is just like the sheepherder throwing in the towel to follow the sheep – and, in this case, even the sheep would (sheepishly) maybe admit privately that they don’t disagree with the strategy – they just don’t want to take a risk where the risk/reward isn’t to their benefit.

I will – very reluctantly – admit that tweaking/ruining the strategy’s novelty might be the optimal short-term economic strategy, and may result in more immediate fund-raising success. But where is the fun in that? What is the point? Where is the break-out upside? It isn’t there. You are just conforming to be like everyone else.

However, I wouldn’t waste a lot of time on a strategy that is doomed to failure either. If you know that the main investor group just can’t invest in your idea, probably for the reasons I outlined above, don’t spend two years with a fruitless private placement memo trying and failing to raise a billion dollar fund that is doomed to failure or, worse yet, that a Blackstone-type party will do itself if they like the idea. Nor would I use a straight-down-the-middle fund-raising advisor either, as such an advisor would advocate you soliciting the mainstream investors who will likely not be able to say “yes” for the reasons outlined above. Overall, the odds are stacked against you and you could waste two or more years of your life being essentially jerked around and come up empty.

What I would do is approach those who are outside the normal channels, i.e. instead of pension funds, insurance companies, endowments, and similar parties, I would look towards high net worth individuals, family offices, and investment funds that make it their bread and butter to seek alternative investments and that are deliberately set up to not follow the herd. There are a lot fewer of these parties, and the way forward will be tortured, like following a narrow bending path up a mountain; however, I think the chances of success are much higher.

As an outgrowth of this strategy, I would also dial down my fund-raising size dramatically. Instead of visions of billion dollar funds dancing in your head, consider a fund of, say, $25,000,000. All you would want is the bare minimum for a “proof of concept” and an amount you can invest quickly to confirm the strategy is doable. Once you have that, it will likely be a very different story when you go back to the mainstream investors. They will likely change from skittish to eager very quickly.

If you follow this strategy, the only thing you can be sure of is that you don’t know what will happen. However, a strategy where you don’t know what will happen is a lot better than a strategy that is likely doomed to failure (as is the straight-down-the-middle strategy), so mathematically, this strategy is optimal. Also, if things go badly, you will spend a lot less time and money failing.

By the way, if “you” mainstream investors are reading this when you are visited with a Uniqueness Challenge, consider giving the guy presenting to you a break. Maybe this is your big chance to stand out from the herd yourself. Maybe this is a time for you to take a chance too…

If you are a reader of The Real Estate Philosopher and have thoughts on this, feel free to email your thoughts to me and maybe I will put them out in the next article as a follow-up piece.

Finally, if you have an outside-the-box idea in the real estate world that perhaps rises to the level of a Uniqueness Challenge, I hope you will give me a call or shoot me an email. There is nothing I like better than trying to figure out how to make unusual, different and unique ideas successful.

Porter’s Five Forces in the Real Estate World

Michael Porter is a professor at Harvard Business School. He has spent his long career analyzing strategy and competition. His analysis is exceptional and probably just about everyone in the business world knows all about him; however, I have never seen his theories applied to the real estate world.

The most interesting thing about Porter’s work, at least to me, was his admonition that the goal should “not” be to “compete” with one’s competitors, as all this really does is give away your upside to your customers, employees, suppliers and other parties (e.g., competing on price just helps the customer). Instead, the smartest thing is to do something “different” from your competitors. Indeed, asked what the biggest mistake companies (and those leading them) make, Porter’s response is exactly that: Companies trying to beat their competition when the goal should instead be to extract as much “value” as they can out of their industry.

Porter, after many years of thought and analysis, concluded that there are five forces that dictate the competitive situation in an industry. In a nutshell, and generally speaking, when these forces are strong, it is kind of rough to be a player in the industry, and when these forces are weak, it is great times.

As the managing partner of a New York real estate law firm, I have performed this analysis for my firm and have found it to be quite helpful. Indeed, the sine qua non of my law firm is to try to be different from other law firms by becoming a top player in the real estate niche, rather than trying to be all things to all people. Instead, my firm focuses “only” on real estate; hence, our brand as The Pure Play in Real Estate Law.

I am now going to do my best to illustrate how one might do this for an “industry” that is part of the real estate world.

Also, I would like to emphasize that this is not pointless philosophizing, as I would think that anyone considering entering an area within the real estate industry, or considering a project in an area of the real estate industry, should logically do exactly this analysis.

Before one can get to an analysis of the five forces within an “industry”, one has to define what “industry” it is that one is analyzing, and that is not as easy as it might seem. I mean, is the industry to be analyzed:

All real estate in the world?

Of course not. Is it then:

All real estate in, say, New York City?

Still kind of too broad, so maybe:

Building housing in New York City?

I think still too broad, so how about

Building condominiums in New York City?

Even that may be too broad as most people think there are three submarkets consisting of relatively affordable, medium range, and super high-end luxury, so how about:

Building super high-end luxury condominiums in New York City?

That sounds kind of reasonable to me as an industry for analysis, so let’s go with that for purposes of this article; however, as I hope is relatively obvious, an “industry” could consist of innumerable concepts including those based on geography, product type, way of doing business (locally, nationally or internationally), deal structure, new economy, etc. There are always innumerable ways to define the industry one is analyzing and it is easy to get bollixed up and diverted or to fool yourself in this analysis; however, for the conclusions to have any use this is critical to do. I deliberately picked a relatively easy industry concept for purposes of this article.

So now let us embark on our analysis of the Five Forces as applied to the industry that is the building and selling of super high-end luxury condominiums in New York City.

If you have been wondering, here are the Five Forces, which I will go through one by one to reach a conclusion as to whether the competitive forces are low, medium or high:

  • Competitive Rivalry

  • Threat of New Entrants

  • Threat of Substitutes

  • Bargaining Power of Buyers

  • Bargaining Power of Suppliers

Competitive Rivalry: This one seems to be quite high. There is a ton of competitive rivalry right now. There are quite a few players building and selling super high-end luxury condominiums in New York City.

Threat of New Entrants: This one seems to be relatively low or at best medium. It is not so easy for someone to just go out and build a super high-end luxury condominium in New York City. There are innumerable regulations and other obligations to be dealt with. Plus the reputation of the party building the condominiums has a great deal to do with a project’s success, which is a further barrier to a new entrant. Accordingly, a new player will have a great deal of trouble just moving into this industry.

Threat of Substitutes: This one seems to be quite low. It is difficult to come up with a substitute to this product as there is only one New York City. One could argue that living in Brooklyn is a “substitute”, and there is a slight element of that; however, overall I would say this threat is a low one in view of how we have defined the industry. Another possible “substitute” could be renting instead of buying; however, that also doesn’t seem quite applicable at the top end of the luxury market.

Bargaining Power of Buyers: Of course this fluctuates, but right now the bargaining power of buyers seems pretty high as there seems to be more super high-end luxury condominiums than buyers. The obvious difficulty in analyzing an industry such as building and selling super highend luxury condominiums, that makes the risk/reward perspective so much worse, is that you are not selling your product right now but in the future when you don’t know what the bargaining power of buyers will be. To be safe, even in a time of a shortage of luxury high-end apartments, you would have to assume the bargaining power of buyers is high even at times when it isn’t.

Bargaining Power of Suppliers: This one seems to be very high as well since one of the problems in making a profit in this market is it is taking longer to obtain the necessary supplies, plus the pricing has risen for these supplies. Indeed, workers, to my mind, are also technically suppliers too; and, due to the construction boom, the cost of workers is much higher.

So to sum up:

Competitive Rivalry: High
Threat of New Entrants: Low/Medium
Threat of Substitutes: Low
Bargaining Power of Buyers: High
Bargaining Power of Suppliers: High

Looking at the above it seems that overall the Five Forces are pretty strong in the super high-end luxury condominium industry in New York City. This would mean that it is (probably?) not the best industry to go into right now because it will be more difficult to make a profit

So this is a very quick and dirty analysis of how one might apply Porter’s Five Forces to the real estate world. I did it very fast here and without a ton of depth as my goal was to illustrate rather than dive into a deep analysis.

To sum up, and hopefully make this article useful to you in your real estate business, the way to apply Porter’s Five Forces is as follows:

First – figure out what “industry” you are in or are you would like to move into. This should not be quick and dirty. You really want to spend a lot of time on this as there are many subtleties and you can end up with the right or wrong results just by how you define the industry. It is actually the most difficult part of the analysis. For example, is Ford Motor Company in the “car business” or is it in the business of “transporting people.” And are you in the business of building buildings for people in a certain market or in the business of providing a lifestyle for people. You could see a lot of difference in analysis and results depending on this.

Second – go through the five forces and analyze each one as it applies to your industry.

Third – be honest with yourself about the application of these Five Forces to your plans and take these Five Forces into account in planning your actions. Of course, this is not the whole story, and a possible problem for Porter’s analysis is likely the cyclical nature of the real estate markets that you have to adjust for (i.e. the Five Forces may change a great deal from the day you start a project until the day it is ready to be sold). However, overall the goal with the Five Forces is to permit you to make a more informed decision whether to go into a market deeper or possibly to get out.

In my next article, I am going to work further with Professor Porter’s works and apply his definition of competitive advantage to the real estate world. To get you excited about my next article, I will give you his definition, which I find incredibly insightful:

Competitive advantage depends on offering a unique value proposition delivered by a tailored value chain, involving trade-offs different from those of rivals, and where there is a fit among numerous activities that become mutually reinforcing.

A Special Idea to Create Value in Real Estate

I was going to have this article be about applying Porter’s Five Forces to the real estate world. That will be a great article when I write it; however, A very interesting value-creating idea just struck me this beautiful afternoon in New Jersey, and I thought I would sneak this idea in first through this (very short) article.

If you will hearken back to my first article:

Using Drucker to “create” customers by marketing and innovation.

And then my second article:

Creating value by amassing intellectual capital in, and ownership of, small-sized niches.

As an outgrowth of both of these articles, I suggest that a great untapped market for creating value in real estate is through developing expertise in operating businesses that have real estate as a major component.

There are obvious candidates such as hotels, retailers that own real estate (and spin it off and turn it into REIT’s), and things of that nature. These are easy and obvious examples. And these are of course fields well-plowed so I doubt you can do what I advocate here. If you are a hotel expert, you are hardly unique enough anymore. What I urge here is picking smaller niches and using the theories I espoused in my prior two articles to create special real estate value in these niches in which you develop significant intellectual capital.

Some examples – I could think of off the top of my head — are: amusement parks (small and large), garages, restaurants (and other related things like beer gardens), retail space that is just too large and could be turned into operating businesses (consider bazaars, farmers markets, specialty markets, pop-up stores), co-working space (a perfect example of this), shopping center owners with multiple locations creating almost private label brands by backing start-up retailers, urban for-profit schools, etc. There are probably an almost infinite number of ideas here.

Then follow the thinking outlined in my prior articles to create the necessary intellectual capital by learning everything possible about the operating business. Once you have achieved this, you have a powerful competitive advantage as you are the only one (yes, the only one!) who now understands both real estate and the subject operating business. As we all know, knowledge is power, and this power gives you a great advantage in buying, investing, operating, selling, financing and – of course – creating value.

Is this easy? Of course not. But what choice does everyone have? One thing that the internet has done is taken away the easy pickings, since everyone knows everything at the same time. Anything that is simple isn’t going to be a value creator because everyone will see the same things and bid the price to a point where the risk and reward equilibrate, so the best you can do is perform “average”. The goal now has to be to create intellectual capital that only you have and the only way to do that is by creating that capital between your own ears by learning and thinking and creating.

Creating Value in the Real Estate World

In my wanderings and discussions with clients and other friends in the real estate world, I hear many different plans from many different people. Many plans are of course brilliant and well executed; however, I do see a perennial fundamental flaw in many plans that I would like to talk about. Here is my thinking……

I believe that in just about every really promising real estate deal – or real estate platform – there is a party that “creates value.” Obviously this is more pronounced and obvious in a project that is architecturally and aesthetically beautiful and different or in a cutting edge project in a different location, but it is also true in the most mundane of transactions as well. There is someone that has brought some “value” to the deal or to the process. The trick in a good business plan (for a deal or a company) is to be that person on a consistent basis.

I don’t know if others look at things this way; however, I get a sense that typically lenders, fund managers, insurance companies, sovereign wealth funds, family offices and other providers of capital (collectively, “Capital Providers”) give this “value creation” away to developers, owners, sponsors and brokers (collectively, “Sponsor Parties”) without really thinking about this concept. Also, my sense is the Sponsor Parties sometimes go into business without thinking deeply about how they might set themselves up to really create value that they can bring to Capital Providers.

Consider what typically happens vis a vis the Capital Providers. Toby (a metaphor), who works for the Capital Provider sits in his/her office and waits for possible deals to roll in. Toby is a great marketer and knows how to create deal flow. He knows that the key rule is to get out and about with people, build relationships, and try to make deals work and do great and careful underwriting. But there is one thing Toby is not (typically) doing, which is “creating” the “value” in the deal. Instead, he is in the “reactive” seat, and waiting for the “proactive” Sponsor Parties to create the deals to be sent to Toby for evaluation.

Why is he doing that? I don’t think there is a good reason. I think it happens this way largely due to inertia, and the fact that that is just the way everyone typically does business. But, I think that there is really no reason why Toby can’t create deal value himself. Let me give an outline of an idea:

Let’s say you are the CEO of a Capital Provider (say, “Smith Capital”) which is a $1B opportunity private equity fund that invests in deals of all types in the U.S. Sponsor Parties solicit Smith Capital with deals it might invest in and Smith Capital analyzes hundreds of these deals every year, does solid underwriting, and then narrows them down to about twenty deals it tries to do, of which let’s say five actually close.

In all of these deals – alas – Smith Capital has competition from other Capital Providers. Maybe these other Capital Providers are more eager – or dumber – or whatever – so they offer better terms than Smith Capital is willing to offer so Smith Capital doesn’t get the deal or its pricing (and hence its risk/reward) gets worse. Of course this will likely end up being the case since the Sponsor Providers have provided the “value” that Smith Capital and its competition are bidding for.

How about instead you ask your acquisitions guy – Toby – to pick a specialty area to become a major expert in? And I don’t mean a big area that is in the typical real estate food groups (like retail, multifamily, etc.) but a much smaller niche, like, say, garages, golf courses, co-working space, or another much smaller niche — the thinking here being that the niche has to be small enough that Smith Capital can dominate it.

As an aside, the niche should be somewhat creative. For example, a purely geographic niche sounds interesting but doesn’t last very long. As soon as others realize a location is undervalued, the prices get bid up. Of course, the first player can do well, but usually it is very hard to be sure that when you get in on the ground floor in a geographic location whether the overall market will really rise or not; accordingly, the risk/reward is not necessarily easy to evaluate.

As a metaphor for this niche idea for Smith Capital and Toby, let’s pick parking garages as the example.

Now, what Toby does is the following: He reads everything possible about garages. He finds out who are the major players, costs, advantages, disadvantages, and little known facts (like what local fire departments say about different garage types). He has a gaggle of Google alerts from all sorts of angles on garages. He gets the garage trade publications. He tells everyone about it – both internally at Smith Capital – and externally too. He then ramps it up by going to garage conferences. He goes out and meets the owners and developers of garage companies. After just a few months Toby is Toby the Parking Garage Man! He knows everyone and everything. He has relationships. He has strong and coherent ideas about how to invest – including what to avoid — and is now able to apply this knowledge to create “value” in deals. He knows the REIT issues that pertain to garages – he knows the operational issues – he knows (personally) all the good operators – and most importantly he knows the risks.

His presence now is an upgrade to the “value” that Smith Capital can provide because third parties start thinking that if there is a garage as a significant portion of their deal then maybe Smith Capital should be called to be involved, as they could provide some “value’ due to the intellectual capital that Toby has developed pertaining to garages.

Maybe lenders will like Smith Capital in the deal, since lenders are more concerned nowadays than ever about the talent in the equity that they lend to. Indeed, possibly (dare I say), the lender might even recommend to the Sponsor Provider that Smith Capital would be a great co-investor in the deal due to its expertise. Maybe even the Sponsor Party (who usually struts around, since he holds the “value” cards) isn’t quite as cool anymore because Smith Capital can enhance the upside of the deal pertaining to the garage adjunct. Also, maybe Smith Capital has relationships that can be mined to help the garage part of the deal get better.

Eventually Smith Capital starts to be a major player in the garage space. They know everyone and everything. Everyone comes to them for advice and they are the first stop – and the last stop – for proposed deals that have garages in them.

To end the story, instead of Smith Capital giving away the value creation to the Sponsor, it is Smith Capital now creating at least part of the value and upside, which means that Smith Capital can negotiate much better terms with the Sponsor Party.

By the way, I know I directed this article at Capital Providers; however, that is just serendipitous, since my thinking is exactly the same for Sponsor Parties. In order to be able to demand good and strong terms, Sponsor Parties should do the exact same thing; namely, develop niche-type expertise that they can use to create value.

So I hope I have made my point here. To conclude:

If you are a Sponsor Party or a Capital Provider, I propose that the name of the game is figuring out where the value will be created in the real estate deals you are seeking, and then set yourself to really “proactively” create that value, rather than “reactively” wait for someone else to create it and bring it to you. And the way to do that is by using your assets – the brains of your team – to create intellectual capital in small-sized niches that you can own.