Keep your deal pipeline full like the pros

Written by Tyler Kastelberg

August 15, 2021

Happy Sunday!

The response to my email last week was MASSIVE. Thanks to everyone who read and responded.

It’s hard to top last week’s Elon Musk business advice, but I’m going to give it a shot with a discussion about how the “big boys” of institutional real estate source deals. Grab a drink, throw your feet up, and let’s dive in.

Grow deal flow like the pros.

Before working on this piece, I thought that institutional real estate firms exclusively sourced their deals from brokers. However, I was wrong. In addition to brokers, institutional firms leverage relationships with other firms and public auctions to keep their deal pipeline full.

Note for the “dial til I die” community — big firms do not employ analysts who cold call lists of owners to find off-market deals. It’s not scalable – more on this later.

Earlier this week, I connected with Michael Dornbusch on the topic of sourcing institutional-level deals. Michael has worked on acquisitions teams at Silverpeak and Triangle Capital Group. The below excerpt is from Michael, with slight edits from me to make it more understandable by us basic folk.

Most large deals are owned and sold by other funds, institutions, and other large, vertically integrated operators which have a fiduciary responsibility to their shareholders to maximize price – which most shareholders would suggest requires a fully marketed process through a reputable brokerage company.

Large opportunistic investors can find the cracks in capital structures to realize large off-market deals. Those acquisitions are predominantly through special situations – (i) large acquisitions being sold by families, family offices, and other syndicates that would rather the sale not be known for personal reasons (partnership issues, realized losses, etc), (ii) as well as acquisitions from lenders, for some of the same reasons (reputational, etc.). These types of situations require significant time and energy to source for investors and their operators.

Why don’t institutional firms build teams of people who cold call for off-market deals?

More from Michael (again, slightly edited by me) —

Real estate is a generally lean business. Anyone who has recruited for real estate roles or worked at a real estate shop will know this implicitly. Additionally, senior personnel who are typically focused on sourcing are significantly more expensive than more junior underwriters. As a result of this, being proactive in sourcing can be an expensive, somewhat fixed-cost endeavor compared to paying a broker’s contingent fees. While this may not result in as lucrative of returns to investors when compared to a strict focus on off-market sourcing regime, market returns typically factor in these brokerage transaction fees.

What about auction sites?

Institutional private equity and development firms will also keep a pulse on government auction sites. When a military base is retired, the land and assets are typically auctioned to the highest bidder. While many military bases are in BFE, some are located on geographic gold, like Alameda in the San Francisco Bay Area.

Do brokers really have off-market deals?

An off-market deal is simply a property whose owner is accepting unsolicited offers. Brokers are a massive source of off-market deals, as they are usually the first person to hear about an owner who is open to accepting offers. 

Why? While it usually doesn’t make sense for investment firms to cold-call owners, brokers are the kings and queens of cold-calling. With no base pay, brokers are very incentivized to hunt for listings at all costs. What about mailers? … leave them to the brokers.

As confirmed by Dante Giacomini with Transwestern in Oakland, cold-calling is their best way of starting new relationships with property owners. 

My thesis. I believe small and medium-sized sponsors and developers who want to scale should abandon un-scalable deal sourcing practices (like cold calling owners) and leverage broker relationships as a force multiplier in their business. A relationship with a handful of brokers in your target markets can drive massive deal flow, both on and off-market.

Let me know – do you agree that the best way to scale your deal flow is by leveraging brokerage relationships?

Thanks for reading!

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