What is middle market real estate investing? This slice of the overall commercial real estate market is typically defined as properties valued at under $100M, or transactions with total capitalization under $100M. On the low end middle market real estate typically is not considered to include properties or transactions under $5M (excluding most single-family homes and small multifamily investments). Consider, for example, a recent EquityMultiple investment, wherein the sponsor acquired an extended stay hotels portfolio for $11.1M.
Middle market real estate transactions are often passed over by institutional investors, such as major asset managers like BlackRock or Starwood. This is generally because investments of this size are not palatable to major institutional investors given the legal and/or bureaucratic red tape in these larger organizations.
Therefore the middle market slice of the overall real estate market is generally underserved by capital. This creates opportunity for attractive risk-adjusted returns among middle market real estate operators, and individual investors who are able to tap in.
Why Is Middle Market Real Estate Investing Appealing?
Profitability of private-market real estate investments is a function of skilled management and asset selection, but also simple supply and demand in capital markets. If institutional money does not go after middle market assets as much as supply and demand would otherwise dictate for that type of real estate product in that market, this creates potential opportunity for middle market operators. Less competition from bigger investors, more opportunity for those operators who are able to target the middle market.
Here’s another way to look at it. Private-market real estate investing is about tapping into market inefficiencies. Opportunities arise when a market or neighborhood is undervalued. Or, in unique circumstances where a seller must liquidate and a well-informed buyer (sponsor) can acquire an asset at an attractive basis. These opportunities arise in the middle market, where institutional players are not nimble enough to tap in. Tellingly, 92% of commercial real estate transactions are less than $50M in total capitalization. The universe of private market real estate assets, transacted in highly inefficient markets, is too vast for most institutional players to touch.
Middle market real estate sponsors and operators are potentially able to tap into a broader and less competitive set of potential transactions and projects, and at a quicker pace. Since timing is hugely consequential with private-market real estate investments, this last point is significant.
Geographic Considerations
Aside from deal size, middle market transactions are often associated with non-gateway markets. Fast-growing secondary and tertiary markets are often passed over by institutional players because they are less of a sure bet, and hence don’t fit within strict underwriting guidelines. This, again, lessens competition and opens up opportunity.
Some factors that may make emerging markets more appealing, aside from lower competition:
- Higher cap rates, offering the potential for attractive near-term cash flow and appreciation in the form of cap rate compression.
- More upside potential: all else being equal, investments in tier I markets like New York city offer stability but, due to heightened competition, less potential for a home run.
- Diversification. There are over 150 cities in the U.S. with population growth over 100K, and positive population growth from 2020 to 2022. Investing a broad set of lower-competition metros can potentially help investors derisk and gain more exposure to upside.
The Flip Side: the Sub-Middle Market
Are investments under the $5M cutoff (“sub-middle market”) worthwhile? Again, this is generally referring to single-family homes and small multifamily. While such investments can be lucrative, they generally are not large enough to benefit from economies of scale in operations and value-add improvements. These small transactions also generally entail more vacancy risk. In a larger property with more units, losing one tenant often does not mean a loss of a large percentage of rental income, and operators can derisk by staggering lease expiration timing. In other words, the middle market represents a sweet spot where operators can tap into greater scale while facing less competition.
For most individual investors, accessing CRE assets valued at above $5M is impractical or impossible. Even if you have the capital, the operational and transactional complexities are generally prohibitive. This is where EquityMultiple steps in: sourcing high-quality middle market operating partners; vetting the partner and the asset; and ultimately structuring a broad range of middle market real estate investments that individuals can participate in fractionally and passively.
Are All Middle Market Real Estate Investments Good?
We’ve laid out the case for middle market real estate investments. But are all middle market opportunities attractive? No. Above the middle market, the quality of operation and due diligence is generally very high. In the middle market, sponsor quality may vary. This is why sponsor vetting is critical. Whether you are investing in an offline syndication or via a platform like EquityMultiple, be sure to understand the track record and experience of the sponsor.
It’s hard to go it alone with middle market commercial real estate investments. EquityMultiple makes it easy.
EquityMultiple provides investors additional protection by conducting sponsor due diligence, as well as further underwriting on the investment itself. We also build investor protections into our operating model and how we structure investments.
Middle Market Real Estate Investing — FAQs
Q: What defines middle market real estate investments?
A: Middle market real estate investments typically fall between $20 million and $50 million in value. They represent a segment that is accessible to individual investors and small syndicates, offering a balance of risk and return that is distinct from both smaller and larger investment opportunities.
Q: Why are middle market investments considered a sweet spot in CRE?
A: Middle market investments are seen as a sweet spot because they offer a balance of accessibility and growth potential. They are large enough to provide significant returns but small enough to avoid the intense competition and high entry barriers characteristic of larger institutional investments.
Q: What are the risks associated with middle market real estate investing?
A: Key risks include the potential for higher speculation, illiquidity, and variable transparency levels among sponsors. These factors underscore the importance of comprehensive due diligence and a well-considered investment strategy.
Q: How can I start investing in middle market real estate?
A: Start by educating yourself on the market, developing an investment strategy, and building a network of advisors. Platforms like EquityMultiple can facilitate access to pre-vetted opportunities, providing a streamlined entry point into middle market investing.
Q: How does EquityMultiple fit into middle market real estate investing?
A: EquityMultiple offers a platform that connects accredited investors with a range of pre-vetted middle market real estate opportunities. Our focus on due diligence, transparency, and investor education makes us a valuable partner for those looking to navigate the complexities of CRE investing.