There is no shortage of capital searching for opportunities in commercial real estate.
In most cases, this has generated high competition, compressed cap rate and pushed asset pricing.
The middle market sector—defined as deals valued at $20 million to $50 million—is a rare sweet spot for CRE investment. Too small for big institutions and too large for many high-net worth individuals, the market segment offers plenty of opportunity.
The middle market is also the playground for Walker & Dunlop Investment Partners, who is finding a lot of success in the sector.
“The middle market happens to be the largest portion of the commercial real estate market,” Sam Isaacson, the president of Walker & Dunlop Investment Partners, tells GlobeSt.com. “It makes up the majority of the real estate in this country. A lot of that real estate is owned by baby boomers, and a lot of them are getting older and are making changes to their real estate holdings.”
Equity capital is also not interested in middle market investments. These players have too much capital to deploy to consider a middle market deal.
“A lot of the institutional owners of commercial real estate, like the pension funds and the endowments, have significant capital to deploy at any given time,” says Isaacson. “When they are looking to deploy capital into real estate, they are not going to look at a $4 million or $5 million equity check on a middle market asset. They are focused on deploying $20 million to $25 million at a time. We see that over and over again. There is less capital chasing those middle market deals.”
As a result, family offices and other mid-tier private investors end up transacting in the middle market space.
“That isn’t to say that we don’t see competitors, but it isn’t nearly as saturated as assets that are $100 million-plus in size,” says Isaacson.
While the price tag is a primary marker of a middle market asset, quality of tenancy and asset functionality are also characteristics to look for in a middle market asset.
“We have been really successful at investing in the older vintage ex-manufacturing facilities in blue-collar markets in the Midwest,” says Isaacson. “We have done really well at repositioning those assets into warehouse and logistics assets from some dysfunctional use. That has been really successful.” Walker & Dunlop Investment Partners is also investing in neighborhood centers with mom-and-pop ownership. “We are fairly bullish on them,” says Isaacson, adding that office is the only asset in the middle markets that the firm is eschewing. “We don’t think the COVID story has run its course.”