The Real Estate Philosopher


What is a Power Niche?

Feb 27, 2017

One of the most important things for any real estate business and, indeed, any business is a successful marketing program.  Of course in our hearts we want to believe that if we just do something great then everyone will figure it out and be impressed.  But alas, that is just not true.  Indeed, Einstein flunked physics and couldn’t land a job.  And everyone has an example of a super-talented person that ends up just toiling in the trenches for someone else.  Like it or not, the world belongs to the marketers.  And I believe that this will increase more and more over time.  Someone – but I cannot find the exact quote – said something like this:
 
“The world will increasingly belong to those who create the ideas rather than those who execute them.”
 
In the real estate world it is no different.  If you have a great “brand” (which of course is built by a successful marketing program) you typically succeed -- and the converse.  This is the basic reason why Warren Buffet – arguably the world’s most successful investor – focuses on brands; namely, for their long-term premium pricing power. 
 
So how do you create a strong brand in the real estate world?  The simple answer is that you do this by creative and intelligent marketing.
 
I have become a student of marketing over the past ten years, including both reading everything I can lay my hands on and at the same time analyzing what works and what doesn’t work and delineating the reasons for success and failure.  After thousands of hours of study, I have come to the conclusion that the secret of a successful marketing campaign and, concomitantly, the essence of building a successful brand (almost) always centers around what I call:

  • a “Power Niche”

This is a concept and phrase I have invented and coined; however, for any intellectuals reading my writings, you will quickly realize I am building on the works of Peter Drucker and Michael Porter and other great intellectual giants in the business world.
 
As an aside, I note that there are certainly other ways to be successful, such a being the low-cost-producer; however, generally the other angles (including being the low cost producer) are typically much more difficult to effectuate and maintain; however, just about anyone can build a Power Niche.
 
So what do I mean by a Power Niche?  Here is my definition: 
 
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.  
 
A Power Niche is often difficult to identify and at the same time counterintuitive, and indeed kind of scary, but once figured out is very easy to accomplish and can be crazy-lucrative.  Indeed, just about anyone can create a Power Niche successfully.
 
Indeed, for my law firm, I am a lot better off as The Pure Play in Real Estate Law than I am trying to be all things to all people.  It was surely an unsettling decision, to become the Pure Play in Real Estate Law as when we enacted this we were theoretically scaring off the 99% of clients in the world who are not in real estate.
 
But consider that in the (smaller) real estate world my firm is a major player.  We are able to know everyone and everything.  This makes my partners and me very useful to our clients in ways that are in addition to “just doing great legal work”.  This of course includes effectuating our mission of “helping our clients build their business” due to our connectively, contacts and industry knowledge.  If I tried to make my firm full service, I would be competing with multi-thousand-lawyer global behemoths and I have no idea how I could convince a client we were the optimal, or even a useful, choice. 
 
In the business side of the real estate world, it is the same thing.  Let me give you an easy example, which is deliberately quite simplistic.  Let’s say you are in the multi-family business.  You do what is called “build-to-core.”  This means that you find locations for multifamily buildings, you get a construction loan and you build a high-quality building.  Then you rent it out.  Simple, right?
 
However, if your building looks like other buildings, how are you going to make a profit that on a long-term basis will be greater than just average?  You could convince yourself that your building is “better”, but what does that really mean?  Does it mean you paid more for a better location?  If so, your costs are higher and hopefully your rent is higher to make up for it.  Or did you do a better job of building it with higher quality contractors?  Same thing – you paid more and hope to get more rent.  I wonder whether that is really much different from making it cheaper and charging less?  It is two sides of the same coin.  In the short term you are making bets that may or may not pay off.  In the long term, what you are doing is making a product better and hoping to charge more for it because of that.  Indeed, Michael Porter says that the biggest mistake people make in the business world is making things “better” when they really should be concentrating on making things “different.”  And of course that is what I mean by the Power Niche.
 
So instead of the usual plan (outlined above), what if, for example, you modified the marketing and business plan for your residential real estate company to more narrowly concentrate on the LGBTQ community?  I picked this concept at random but please follow my point through.  What would now happen?  A bunch of things:

  • You would learn everything about the LGBTQ community

  • You would learn what they like and dislike

  • You would target your building towards LGBTQ people (and figure out if in fact they wanted to live with other LGBTQ residents)

  • You would develop intellectual capital at your company around this

And you would build your building to make it one where LGBTQ people would want to go. 
 
You would be building a Power Niche.
 
Your market would be smaller – much smaller – but if you did it right you would do what Dale Carnegie says in his famous book, How to Win Friends and Influence People, namely, to “arouse an eager want” in the customer. 
 
Would LGBTQ people pay more rent to live in a building that was really about the LGBTQ community in New York City?  Honestly, of course I don’t know that and there is always risk in any new idea.
 
But this is just the beginning of the Power Niche.  Once it became clear to the market that this was your business’s focus, LGBTQ people would want to work for you.  LGBTQ businesses would want to do business with you.  Advertisers would want to advertise with and through you.  You would find all sorts of opportunities you wouldn’t otherwise see because you would be the “only one” focusing on this.  You would learn more and more and become a font of intellectual capital on the LGBTQ community’s interaction with the residential real estate world.  People would want you to speak at conferences.  You would be the expert’s expert in residential real estate for the LGBTQ community. 
 
If the idea worked for a first building, your next building would be a no-brainer to get investors and lenders and other parties.  And after a while, everyone would be chasing you to invest with you and do business with you.
 
Instead of trying to be “better” and playing the odds on paying more for a better location, you would be a “brand” that had a small but targeted customer base. 
 
You would have established a Power Niche in the real estate world and as Warren Buffet would presumably like, you would be able to sell your product (i.e., brand) at an above market price for a long-term period of time. 
 
Guaranteed success?  Of course not.  Obviously there are social issues at play here as well (for this particular Power Niche), but I still like it a lot better than the other game plan in “build-to-core”, in which you are a lot more at the mercy of the market.  Indeed, when the market falls apart for multifamily, which place do you think will hold its rental value better?  All the buildings that look pretty much like each other, or the “one” building where LGBTQ people really want to be.


Featured Article:  Have you heard of the Committee on Foreign Investment in the United States (“CFIUS”)?  If you are a player in the U.S. real estate world, you need to be on top of this – no two ways about it – as this is a Federal Government regulatory scheme that you need to comply with in any transaction involving a non-U.S. investor.  It used to be that CFIUS was hardly noticed in the real estate world – but that is changing – and awfully fast.  Here is some (very) quick background…..

You probably remember the controversy surrounding the proposed acquisition of six U.S. ports by Dubai Ports World in 2005.   This was all over the news, and the negative attention ultimately caused Dubai Ports World to abandon the transaction – and further resulted in Congress’ re-evaluation of the Government’s role in reviewing investments by foreign entities.  As a result, the CFIUS regulations were significantly revised, and the amended CFIUS regulations remain in place today.

By way of general description -- CFIUS is a committee comprised of multiple agencies of the U.S. government, including the Departments of Treasury, Defense, State, Homeland Security, Energy, Commerce and Justice.  CFIUS has the duty of reviewing, investigating and potentially blocking any transaction that could result in foreign control over a business, or asset, that may raise national security concerns or may involve critical infrastructure.  The jurisdiction of CFIUS is surprisingly broad.   No transaction is too small to be subject to CFIUS’s review, and the concerns of “national security” go well beyond classified technology – in fact, CFIUS has scrutinized transactions in certain hotels and in properties in sensitive locations.  Moreover, There is significant interest among members of the Trump administration and Congress to expand the powers of CFIUS, including by expanding the scope of transactions to be subject to CFIUS review (including to consider transactions that may impact the U.S. economy, even without a direct nexus to  national defense or infrastructure), increasing the staffing and resources of CFIUS, and otherwise heightening the extent of CFIUS review – especially as to investors from certain countries (such as China).

Parties to a foreign investment transaction may decide whether to voluntarily submit the transaction to CFIUS for approval.  In the absence of approval ahead of time, CFIUS is authorized to later review the transaction– and if it finds national security concerns, CFIUS may require the transaction to be fully unwound, or may impose other obligations on the parties to mitigate and address such concerns. 

Two transactions scrutinized under the Obama administration show the obvious and not-so-obvious ramifications of the CFIUS review process.  The first was the proposed purchase of Aixtron, a semiconductor company, by China’s Fujian Grand Chip Investment Fund.  Given the importance of semiconductors in a variety of military applications, it may not be overly surprising that CFIUS blocked the transaction.  However, CFIUS’ review of a purchase of a windfarm by Ralls Corp. is somewhat less obvious.  There, CFIUS required Ralls (a company indirectly owned by Chinese nationals) to divest itself of a windfarm because of its location – it was located near a naval air station, in restricted air space.

There is a lot of press about CFIUS and the new Presidential administration seems to be pushing this forward as an agenda item.  For example, there is no question that foreign (particularly Chinese) investments in the United States are receiving increased attention – both from our government as well as the press.  (See, for example, Lawmakers Push for Tighter Scrutiny of Chinese Investment in U.S., Wall Street Journal, February 21, 2017; and Double whammy for Chinese capital, in perenews.com, February 10, 2017.)  The concern with foreign investment will not be limited to operating businesses, as transactions in real estate may also attract the attention of regulators – especially through CFIUS.

In light of the expected activities of CFIUS in the coming years, and the potential ramifications of an adverse finding by CFIUS, [nearly?] any transaction involving foreign investment should include an analysis of whether a CFIUS filing should be made ahead-of-time. 

As the Pure Play in Real Estate, Duval & Stachenfeld LLP stands ready to conduct the appropriate CFIUS analysis and filings (if warranted) in connection with any real estate-related investment involving foreign entities. 

For further information, please do not hesitate to contact Kirk Brett (kbrett@dsllp.com; 212-692-5525) or Bruce Stachenfeld (bstachenfeld@dsllp.com; 212-692-5550).


Specialty Practice at Duval & Stachenfeld – Real Estate Litigation: Duval & Stachenfeld has a litigation group that is talented and aggressive.  Our litigators are graduates of top law schools such as Harvard and Columbia.  They are strong advocates and skillful negotiators.  Often our group’s writing “wins on the papers,” but our lawyers also do not hesitate to go to trial when necessary.

As part of The Pure Play in Real Estate Law, our litigation group’s practice features a particular emphasis on real estate disputes.  Over the last two decades, D&S litigators have handled a vast array of real estate matters, including ground lease reset disputes, busted joint ventures, CMBS put-back cases, and foreclosure actions.  We believe being part of the real estate pure play is a major asset in real estate litigation because we are often able to come up with strong theories of attack or defense based on our firm’s extensive knowledge of how real estate transactions are actually put together.  Chances are, we will have worked on a dispute like yours before and you will greatly benefit from that level of experience.

To discuss a real estate litigation matter, please contact one of the following D&S partners:

Brian A. Burns, bburns@dsllp.com, (212) 692-5547  
Joshua C. Klein, jklein@dsllp.com, (212) 692-5528        
Keith E. Blackman, kblackman@dsllp.com, (212) 692-7392

 

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As the Managing Partner of Duval & Stachenfeld – a 70-lawyer law firm in mid-town NYC known as The Pure Play in Real Estate Law – I am inviting you to join The Real Estate Philosopher™. This will consist of my thoughts and also thoughts of friends and colleagues.

It will not be published in any traditional media – it will go only to friends of our firm. The purpose here is very simple – to put forth thoughts in the real estate world that are different, provocative, and challenging of accepted wisdom. Hopefully, nothing said here will be mainstream thinking.

You may be wondering how I am qualified to write on these topics since I am “just” a lawyer. However, I have an unusual place in the real estate world. As the managing partner of The Pure Play in Real Estate Law (one of the largest real estate law practices in NYC), I interact with an incredible number of real estate players. This ranges from small real estate shops with nothing but a gleam in their eyes, to some of the largest real estate institutions in the world, and everything in between. This gives me a unique and global perspective and allows me to act as an amateur philosopher in the real estate world. This has always been my hobby and it is what I love doing.

Regards,

Bruce Stachenfeld
a.k.a The Real Estate Philosopher™

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