Making it in Real Estate Part Four: Specialize or Die

A recent college graduate wrote, asking for advice. Mentioning how thrilled he was to be accepted into Marcus & Millichap’s training program, he wanted to know which area he should specialize in: land, apartments or industrial. I told him it didn’t matter as long as he picked one and stuck with it. Yet to have his first day in real estate, this fellow had already figured out a truth that eludes many: If you don’t specialize, your specialty will be failure.

In small towns noted more for alfalfa than economic opportunities, a broker can be a grammar school teacher, that is, he can know just enough about half a dozen subjects to be one step ahead of his clients and sell anything that walks in the door, from ranches to diners to mobile homes. In a city of size, the competent broker is more of a high school teacher, sticking with one broad subject, selling say only industrial properties. And in major markets, top brokers are more akin to university professors, focusing on narrow niches within their specialty—an office leasing agent who represents only law firms.

But which specialty matters little and which niche almost not at all because each product type will have its days in the sun over the years. But if what you do doesn’t matter that much, where you do it is huge. To paraphrase Warren Buffet, I’d rather be a mediocre developer in a brilliant city, than a brilliant developer in Lancaster, California. My advice? If you’re stuck in my hometown or any other city with Lancaster’s dim prospects, move.

Like every other clueless neophyte, we started out in apartments, but, as profitable as they are for so many, they didn’t work for us. Richer in experience but little else, we soon decided we had no wish to own buildings where anyone slept. Waving farewell to our tenants—some of whom were arguably sane—we shifted into the fast lane, the glamour world of suburban industrial. How hard could industrial be, we asked ourselves. Within months of buying our first pair of warehouses, we began learning about our new business (experience is something you acquire just after you need it). It belatedly dawned on us that when the biggest player in town not only owns a Pangaea of free land, but a construction company that he must keep busy, he’s going to stop building warehouses the week after we rescind the Louisiana Purchase. And rents are never going to rise. Ten years later we cracked the Dom Perignon when we managed to sell our warehouses for exactly what we paid for them. This time we waved bye-bye to tenants who, as always, were merrily melting our parking lot with their cleaning solvents and oil-changing.

In short, rather than being apartment and industrial moguls, we might have more profitably spent our time as forest fire look-outs. But all was not lost. Somewhere during our ten years in the industrial wilderness, we fell into a retail deal and developed a shopping center in Healdsburg, California. That project—we still own it—became the template for everything we’ve developed ever since, namely, neighborhood shopping centers in cities that fight development as if it were contagious. The degree to which we specialize is worth stressing: Within the high school subject of retail, our professor’s niche is this: Our development projects are “necessity retail” (supermarkets, drug stores and discount department stores), they range from 25,000 to 150,000 square feet and are located within a two-hour drive of San Francisco. Within that narrow range, we can often be competitive with larger, better-known competitors, challenging their superior capital with local knowledge and an ability to act quickly.

Our geographic limitation—that two-hour drive time—isn’t based purely on laziness; if a project is no more than two hours away, we can drive there, have the meeting with the city, get our hats handed to us and still get back to the office to deal with other challenges.

By the way, specializing doesn’t mean you shouldn’t move on once the tin mine is played out. When it finally sputters, you need to pick a new specialty (and then stick with that) or a new area.

If you become a developer and have any success at it, you will one day receive a call from a silver-tongued broker. He will be calling from a land far away, from Atlanta or Denver or perhaps Houston. He will flatter you with blandishments about your reputation and, when at last he deems you ready, he will describe a wonderful opportunity that somehow all of the local developers in his city have managed to overlook. Before responding to his siren call, ask yourself this: How likely is it that Atlanta or Denver or Houston doesn’t have even one homegrown, totally-connected developer who is at least as smart as you? And then thank the broker for the call and stay home.