The Average Does Not Exist

The Real Estate Espresso Podcast

The Average Does Not Exist

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The Average Does Not Exist

Welcome to the Real Estate Espresso Podcast, your morning shot at what’s new in the world of real estate investing. I’m your host, Victor Menasce.

I’m very excited. Over the next week, we’re going to have an entire series dedicated to design. Now, when developers talk about underwriting a project, developers often focus on the numbers and forget about the product. In real estate, the product is truly inseparable from the math.

One of the most common strategic mistakes I see is the instinct to blend into the average of the market. It feels safe, feels conservative, and it’s often the most dangerous choice you can make. It’s a choice that’s made even more compelling by the legions of appraisers out there who will look at your project and force you into the middle.

See, appraisers can’t make up data that doesn’t exist, and if there’s no comparable, say three-bedroom apartments on the ninth floor with a 400-square-foot roof terrace, they end up discounting the value of that specific product that may well be differentiated in the market.

Market positioning is not about being different for the sake of being different. It’s about understanding where comparable projects truly sit in the competitive landscape and making an intentional decision about where you belong relative to them. The problem with the average is that it represents a statistical midpoint, not a customer, and it’s certainly not a clear value proposition.

So let’s start with comparables. Comps are not just a pricing tool. They’re a window into how the market has already sorted winners and losers. Each comparable project made a series of choices, whether it’s unit mix, finishes, amenities, parking ratios, density, unit sizes, location, operational strategy, all these different things that make up the total product. The rent they achieve is not an accident. It’s the outcome of all of those choices combined with both timing and execution.

When you blend to the average, what you’re really doing is averaging together multiple very different business models. A luxury building with concierge service and structured parking sits next to a value-oriented project with surface parking and minimal amenities. The average rent between the two does not describe a viable product. It describes a math exercise. There’s no tenant walking around saying, “I’m looking for something exactly in the middle of these two experiences.”

This is where many projects fail. They’re designed by spreadsheet. The developer says, “Well, if Class A gets $2.25 a square foot and Class B gets $1.75 a square foot, I’ll underwrite to $2.00 and build something in between.” The result is often a confused product. The rents don’t materialize because the building doesn’t fully satisfy the Class A customer, and it’s overpriced for Class B. You end up competing with everyone and winning with none.

Strong market positioning requires a deliberate choice. You either align yourself clearly with a defined segment, or you create a product that’s differentiated enough to justify your own category. Both can work. What doesn’t work is hedging.

Think about it from a tenant’s perspective. A tenant is making a decision based on a lifestyle, a budget, some convenience, and identity. They’re not comparing cap rates. If your building looks like a compromise, it will be perceived as one. And a compromise rarely commands pricing power.

There’s also a risk management decision to be made here. When you blend to the average, your downside protection is much weaker. In a softening market, the middle gets squeezed first. The high-end product tends to move down market, and then the workforce housing also gets squeezed as well. So what usually suffers the most is the middle. That mushy middle has no loyalty nor any necessity working in its favor.

I mean, think about positioning in automotive. If you pick a car like a Chevy Impala, it’s not a budget vehicle and it’s not a luxury vehicle. It’s just sort of in the middle. One of the reasons why they don’t sell very well, and they certainly don’t command a premium.

From a capital preservation standpoint, clarity beats optionality. Investors are better protected when the business plan has a very sharp thesis: “We are the best option for the customer at this price point in this sub-market,” and that’s something you can defend operationally. Being a little bit like everything else is not, because when the value is unclear, the discussion always degenerates to price.

Now, that doesn’t mean you should ignore the market. Quite the opposite. You have to study comps deeply, not just average them. Study them to understand the gaps. Where is demand being underserved? Which projects lease up the fastest, and why? Why do tenants compromise today because there’s no better alternatives? Those insights inform the positioning.

I often encourage developers to think in terms of relative rank rather than averages. I’ll give you a simple example. When we first started developing in Philadelphia, in the shadow of Temple University, we started building three-, four-, and five-bedroom apartments the same as every other student housing developer. And then we had one student, a graduate student, that came and rented a three-bedroom apartment for herself. When we asked her why she needed a three-bedroom apartment, she said, “I don’t need a three-bedroom apartment. There’s just no ones and twos available, so I’m taking this because it’s available.”

That insight made it super clear that we needed to stop building three-, four-, and five-bedroom units, and switch exclusively to building ones and twos. It’s that kind of market insight, where you understand where the dislocations are in the market, that allows you to differentiate.

There’s also an executional discipline that comes with clear positioning. Design decisions become easier. Amenity choices become much more intentional. Cost overruns are less likely. See, real estate, as with all markets, rewards conviction, not bravado. Conviction rooted in fundamentals, in research, and truly understanding who your customers are and what’s important to them is absolutely the key.

Now, over the next week we’re going to be doing a mini-series on exactly this. There’s a brand-new study that was just put out by Greystar specifically on amenities and what customers favor nationwide on amenities. And we’re going to be doing a deep dive on that over the next week. I’m very excited to do this, because there’s a ton of insight in that absolutely fabulous body of work. So you’re definitely going to want to pay attention to every single one of those episodes.

As you think about that, have an awesome rest of your day. Go make some great things happen. We’ll talk to you again tomorrow.

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