Office real estate (even including the biggest and best downtown offices) are struggling. The market is continuing to get worse, with one of the longest downturns in the office real estate markets history. In your day-to-day life, the real estate of your place of work probably doesn’t cross your mind too frequently. But, this is quite an interesting discussion to have about the nature of work and how COIVD has changed the office market, likely forever, and if or when things might start to improve. After receiving some boots on the ground information relating to a prior post I wrote talking about commercial real estate I’ve come back to talk specifically about office spaces, since many people may either see an opportunity in office real estate, or something they would rather stay away from (I prefer the opportunity outlook). I am a tad bit optimistic on the long term outlook, but after digging into the numbers a bit more the present situation was somewhat of a shock to me.
Office Real Estate’s Prolonged Rise in Vacancy Rates:
Colliers Canada is a commercial real estate research firm and they publish office reports every quarter at their website. Looking at this report from Q2 2024, there is a chart on the bottom of the second page, that really shows the bleakness of the office real estate market (reproduced below):
Office vacancy, new supply, and net absorption. Greater Toronto Area 2020 – 2024. Colliers.
The point that most interested me was the vacancy rate. It has been climbing from a low of about 4% just as COVID hit, to just around an average of 13% today. There is another chart which shows areas in Toronto and around the GTA and it seems that suburban office spaces are faring just a little bit better than the downtown, and midtown regions. This is a 30 year high in office vacancy rates, and it’s happening across Canada and the US. Additionally, this is the most prolonged timeline of climbing vacancy numbers in office real estate. In the past office real estate was really a sound long-term investment as long as the location was solid, now there has been somewhat of a paradigm shift. In prior recessions the office market usually reached it’s peak vacancy rate about 2 years out then began to improve. This time, things are different.
Why Are Vacancies Getting Worse Four Years Out?
The natural question to ask about this chart is why do these numbers continue to climb? There could be many answers to that question, I’m going to hypothesize a few, but they all center around the changes that COVID injected into the world of work. At this point we all know the work from home story of the pandemic, and how even a few years after the outbreak, people are not back in the office full time, and it makes sense. Many people who were commuting downtown from a suburb 5 days a week benefited from the time and money savings that working from home provided. After having worked from home during the pandemic and being able to flex their schedule a little bit to deal with kids or a family obligation going back is a tough ask.
New Working Ways Are Here to Stay:
Getting people to go back to their old ways is just not going to happen, especially when they feel that there is a better way to work. Many people I’ve spoken to working for larger companies are downright refusing to come downtown more than 2 times a week. A dispute over 1 day in the office this way or that way isn’t worth firing someone over for a lot of companies, especially if the employee is in a good enough position to negotiate. This and similar trends leave the company with a vacant office more than half the time, so they begin to downsize, try to sublease or some other solution.
Downsizing or Rightsizing?
That vacancy chart is effectively showing the aftermath of companies slowly and continually downsizing their leases, or simply not renewing. The reason it was so slow and protracted is because commercial leases tend to be 5 or 10 year leases. As office leases were coming up for renewal during the pandemic, businesses would downsize the amount of office space they needed since half their workforce was working from home. Assuming an average of a 5 year lease timeline, this would suggest that vacancy will continue to get worse until around the 5 year mark as the demand stabilizes and companies understand how much space they want to lease for the new post-pandemic world of work.
What to Do With All This Space?
You may be wondering what is going to happen with all this vacant office space. Well it is possible that the market will recover as the overall job market and economy recovers (see rate cuts) and companies begin expanding once again, but there will still be a considerable amount of un-rented office spaces especially if the office spaces are not AAA downtown spaces. It’s likely that some landlords will have to sell their spaces. You might think that a natural adjustment for the market to make is to simply convert some of those office units into residential units. The problem is that even a simple conversion like this requires lots of time, red tape, money etc. The building code for residential units gets more strict every year (for safety and other reasons), or there may just be no way for a conversion to happen due to the location of walls or other hurdles.
Why Conversions May Not Be Possible:
Even if it can be done it can be prohibitively expensive for smaller landlords to justify the cost of conversion unless they are willing to wait for quite a while to see the return on their investment. Some conversion projects to condos have been a success, this is where your “loft” style residences come from. But if you’ve been following my posts recently, you’d know that new construction condominiums are also having their worst year in more than 2 decades, people simply cannot justify the cost of a new condo, especially when the market is being flooded with existing condo inventory and rates (up until very recently) are so high making everything more expensive.
Will Improving Macro Be Enough?
The options for landlord of office real estate right now are quite limited. If they consider a conversion to a more “retail” style change, they are also facing the problem of more people shopping online. Retail is taking it’s time coming back and while upscale malls are doing ok, many retail establishments are struggling more than they are improving. There is some good news however, it seems like times are changing in the overall macro environment. Jobs numbers came back with improvements in the latest Stats Canada jobs report, inflation seems to be under control, and the Bank of Canada is expected to cut rates a further 50 bps at their next announcement. Which would be a total drop in the benchmark lending rate of 1.25% just this year. These cuts should help get business up and running again and people spending money again since credit will get cheaper, loans, mortgages, and prices will (hopefully) stay somewhat under control.
Why Industrial Survived the Pandemic:
I think that office real estate vacancies will begin to improve sometime in the next year (or two), but it will be a slow and gradual process and there may be a new normal of somewhat higher vacancy rates. Industrial has managed to maintain their relatively low vacancy rates especially outside the city but as mentioned above, with online shopping and stores becoming more and more prominent, we’d expect industrial to have fared a bit better. A home office is much easier to build than a home warehouses or manufacturing facility. It’s also possible that in the long term the use of these buildings will have to be completely changed even if the process is a long and drawn out one.
Final Thoughts on Office:
I know that long and drawn out is never what you want to hear when the news is negative, but that seems to be the situation that office is in for the time being. Leaning back into my more optimistic side, I think that just maybe, people will be looking for types of spaces that aren’t your traditional office setup, but are a place that they can go to get an office like feel, but that is outside of their home. From personal experience I can find home to be a bit distracting trying to get any work done. But, I’m not sure how big of a market there is for this type of thing and it goes very much against the traditional commercial real estate business of renting out to one long term, stable tenant. Maybe the types of contracts will have to become more creative with potential tenants. I don’t have the answer to the problem with office real estate, but whatever it is will require a lot of creativity and will be faced with a lot of challenges and competition (supply). I don’t think it’s doomsday for office, but I think there’s a long road ahead. That’s all for now.
The commercial real estate rabbit hole is never ending. Depending on the situation commercial real estate can also provide better returns than residential real estate partly due to the fact that commercial real estate out the gate is viewed as an investment with a profit motive. Therefore, the only other people you are likely going to be competing against are other investors. Whereas investing in residential is a bit different because you are also competing with people who view it as a place to live not just a way to make money. Therefore, they may be willing to pay more in order to get what they want, meanwhile investors generally speaking are looking for a great deal, a high ROI, and may have a shorter timeline than someone who plans to live in their home for years. The owner/occupant might view paying a premium as a small price to pay for a great house they’ll live in long term.
Does Multi-Family Count as Commercial?
Before diving into the various categories of commercial real estate and the pros and cons of each and what to consider before investing. I want to talk about a category of commercial real estate that is sort of in-between commercial and residential, and that is multi-family commercial. Multi-family commercial is generally 6 or more units, this category of commercial also tends to be competitive with respect purchase prices. In larger cities cap rates (I’ll explain this in a minute) tend to be lower because if there is demand for rental units (e.g. big city = demand), the investment will provide a fairly consistent return without much vacancy or lost rent. Many investors who started out purchasing residential real estate as an investment will frequently work their way up to multi-family apartment buildings once they have the funds to do so, and may even get into construction and development or re-development.
More Competition in Multi-Family Space
However, as mentioned, there can still be quite a bit of competition for these kinds of investments. Although not as much as a typical residential home. On a quick tangent here, in the Greater Toronto Area multi-family investments are becoming harder and harder to find because we simply aren’t building purpose-built rentals anymore (another name for multi-family). In an attempt to make everyone feel like an owner, we have been building almost exclusively condo apartments, which tend to come with high costs, unnecessary expenses, and don’t tend to be all that affordable. Therefore, the price of purpose built rentals as investments have gone up (as have rents) in larger cities. In an attempt to alleviate some of the stress from underbuilding purpose built rentals are conversions of larger homes to 3+ units. This has become very easy to do thanks to recent changes in housing regulations, up to 4 units on a single lot. This presents opportunities for investors who have some skill in construction management, but they may still find it challenging to make the investment work due to the sheer amount of competition from owner/occupants who also want to purchase those homes. However, the amount of converted homes will likely increase over time as investors become more adept at doing conversions and homeowners themselves begin to add additional suites. This could also make these homes become worth even more thanks to the extra income, everyone seems to want an “in-law” suite. So the regulations could really benefit the investors or owners who are able to purchase and upgrade their homes which could benefit supply. But overall we won’t be able to exclusively rely on this method of adding housing supply as it really is a small drop in the bucket compared to building purpose built rental apartments like we did back in the 70s and 80s. Ok, now back to what you came for, talking about other kinds of commercial real estate.
Offices and The Pandemic
Firstly, lets discuss office buildings. If you’ve been following the news in the past 3 years or so we had a small little pandemic. The effects of the work from home shifts that were caused due to the pandemic, meant that a lot of office spaces were sitting vacant for a long period of time. Workers and companies moved to a hybrid model. Then all of a sudden they didn’t need as much space as before. Even the most expensive, sought after real estate 1 World Trade Center in Manhattan had some of it’s tenants downsize and sublease their rentals because they weren’t using the space anymore. The effects for smaller landlords in smaller cities were more significant. From an investors perspective, the high vacancy that office real estate has seen presents a big risk, if you choose to invest, you could face long vacancies and it could hurt your profitability, or ability to pay the bills. However, where there are problems there is also opportunity. Because of the high vacancy rates, you could purchase a “distressed” asset at a very good price (whatever that means in your market), and then come up with a plan to change its use, or change the type of professionals that you cater to. I’ve heard of people renovating their buildings and turning them into co-working spaces, residential apartment buildings (can be a big investment since fire code regulations tend to be different when kitchens and sleeping are involved) and various other conversions. I’m sure you’ve seen some of those old industrial buildings that get converted into extra high ceiling apartments with a rustic feel, generally called lofts, although people can be pretty loose with that term nowadays. But for the right person, and for the creative investor, an investment in office real estate right now presents a TON of opportunity.
Get Your Starbucks Out for Retail
Secondly, what about retail. Now that’s something you don’t think about. But yes, someone (or usually a company) owns shopping malls. Generally those large individual businesses that occupy them don’t own the real estate. They rent out the space as do other various businesses and due to a good location, or modern amenities or what have you, businesses lease the space and try to turn a profit of their own. Investing in retail real estate can be quite a bit more involved and may also require more scrutiny on what types of tenants you want and the tenant mix you are looking for. As an investor in retail, you have to take a different approach and you almost have to view the space you are leasing as a partnership with the businesses that will occupy them. Likewise, if your retail space is subpar, a tenant may choose not to rent there because they may be worried about the sustainability of their business. Both landlord and tenant in a retail situation benefit from a few main components. Traffic through the area. Are there lots of people? Are residences being built nearby? Is there a highway that people often pull off from? Are there any “anchor” tenants: these are tenants like your Walmarts, Tim Hortons, Starbucks, Big Grocery Stores etc. which drive traffic to the area. If you can get good anchor tenants, this may also attract other tenants to the area. Anchor tenants tend to have more bargaining power due to the fact that they will likely contribute a significant portion of the traffic. Economic forces are also a factor, if we look at the pandemic again there was a time and there were many businesses who went out of business because they were either unable or not allowed to operate their in-person stores. This is unlikely to happen again, but people’s expectations have changed and if businesses aren’t changing in line with expectations they could become irrelevant before long.
Light Industrial: Warehouses etc.
Thirdly, probably the most complicated form of investment in real estate, light and heavy industrial. Light industrial is a bit easier to manage, but may still require special considerations. Light industrial involves things like warehousing, small time manufacturing, and other types of businesses that involve warehouses to some degree. This could just be a kitchen, bath, tile warehouse, Costco and IKEA could both fall under light industrial, but since they are also retail it might be sort of complicated to categorize. Depending on the type of tenants that are interested in renting out this real estate you may have to make certain adaptations to the property, or the tenant may request adding more power or maybe a ceiling crane, or other larger things that are used in warehousing. In some ways this type of real estate can be easier to manage, but because every tenant will likely have different requirements you may end up spending a lot of time with engineers to see if the property can be adapted to what they are proposing.
Heavy Industrial: Probably Irrelevant for You
Heavy industrial on the other hand is extremely specialist, and frequently the companies involved in this type of work will just buy the land themselves when possible. This involves things like chemical plants, oil refineries, car manufacturing facilities etc. The big consideration for investors who are thinking about buying land that was previously used as a manufacturing facility is environmental concerns. Land has to pass multiple layers of inspections by the EPA (Environmental Protection Agency) here in Ontario. Often they will require remediation of the land before it can be used again or the land can be sold and remediation costs can go from hundreds of thousands to millions of dollars depending on the damage and requirements of the EPA. So once you start getting into industrial, environmental issues become more of a concern. On a smaller scale it is important to keep in mind environmental concerns when you are purchasing ANY commercial real estate that was either on or around a gas station, a mechanic shop, dry cleaner, certain farming operations, or any other business that heavily uses chemicals. You don’t want to find out when it’s too late that you have to remediate land. So it’s always advisable to research what prior businesses were nearby and to put in a clause to get the land inspected by the EPA prior to agreeing to purchase it. Next I’ll dive into what to do after purchasing land, and how commercial leases differ from residential.
The Commercial Property Lease vs. Residential
With all the examples of commercial real estate above we should talk about leases, since they can be quite different than what a residential investor is used to. First of all, the minimum lease term is generally 5 years with 10 year leases also being common. The screening for commercial leases tends to be more intense, since landlords are expecting the tenant to survive at least 5 years if not longer. The landlord will frequently pass on all the operating expenses of the building. But the tenant may also be able to negotiate that the landlord pitch in on some renovations to get their business operating quicker. There are all kinds of technical terms for commercial leases, generally a triple net lease (or net net net lease) is one where the tenant covers all expenses including large ones such as roof repairs, property taxes, snow maintenance etc. A single net lease (or net lease) is one where the tenant is responsible for it’s portion of utilities and the landlord takes care of the building etc. There is also double net leases, but these terms are somewhat loose and each agreement will be different.
Additionally, in most leases the tenant is able to make whatever renovations they want to a unit, there may be a stipulation that they have to return it to a certain state when they move out. But any renovations are usually the tenants responsibility (unlike in residential where the landlord renovates units for the tenants). Furthermore, there is no such thing as a “standard lease” in commercial real estate, the way that there is in residential. This means that generally a landlord can put whatever conditions they want in a lease, so it is important to read it in detail and have a lawyer review it.
Calculating Rent and Realtor Fees
Note that the realtor fee tends to be a percentage of the total lease which is usually the landlords responsibility to pay. I should also mention that if you are looking to rent commercial space, you will likely have noticed that the way the lease price is presented is quite different from residential. Rather than a per month amount, the price is per square foot. For premium downtown Toronto office real estate (Class A buildings) you may be looking at $40 per square foot, for suburbs it might be closer to $20 per square foot. Just as an example, lets say the space you want to rent is 1000 sq ft offered at $20 per square foot. When you multiply the numbers you get $20,000. That $20,000 would be the annual rent plus any other additional fees agreed to by the landlord and tenant. Each year, the price may change. So in year 1 it might be $20 PSF, then by year 5 it may go up to $25 PSF.
Calculating Square Footage, Useable vs. Non-Useable
Commercial real estate is also a bit strange in some ways because a portion of the common area may count towards the total sq ft that you are renting, this is usually the landlords responsibility to take care of for all the tenants in the building. But it won’t be useable sq ft for operating your business. So you need to make sure if you require a certain amount of useable space that you confirm and measure the space yourself and figure out how much of the sq ft the landlord is asking you to rent is common area square footage. This extra square footage may change your willingness to rent a certain space or to pay a certain price for that space. The idea for renting “non-useable” space is that it’s a nice lobby area for clients to wait in, or its a foyer that makes the building look nice at the street level, and it’s a value add to your business. Some businesses may see it as a value add, others may not.
Capitalization Rate or Cap Rates:
You’ll probably hear cap rate about a million times when you’re looking at commercial real estate as an investment. Essentially a cap rate is what the market requires the property to generate as a return on investment and determines the property value (most of it anyway). For multi-family residential in Downtown Toronto for example a 4-5% cap rate would be considered good. For example, lets say my multi-family building generates $80,000 net of expenses each year (operating income). Let’s also say the generally accepted cap rate in the area is 5%. You take the 80000/0.05 = 1,600,000 is the value of the property. Alternatively, let’s say someone is asking 2,000,000 for a property that generates 90,000 of income. You can find the cap rate by dividing 90,000/2,000,000 = 0.045. So the cap rate is 4.5% for this property.
Analyzing Your Commercial Investment
You do have to be careful when you are investigating a property since naturally the owner will do whatever they can to make it look as good as possible. Owners should have documents of all the expenses of managing the property as well as the rent rolls and vacancies of the property. Sometimes, they don’t and you’ll just get a bunch of estimates. Regardless, it’s important to do your own research and make your own estimations of how much the expenses would cost. Are there some changes, investments, or upgrades that you can make which will improve the cap rate of the property after purchasing? What are the opportunities available that the previous owner didn’t bother to take advantage of? This type of thinking is essential to making a good investment, because usually the market price of a property and the potential of that property can be quite different. It is also frequently the case that the current rents of the property will not cover the cost of financing so to make the investment work you will have to think creatively.
Internal Rate of Return (IRR) and Net Present Value (NPV)
There are other metrics that investors use as well, such as IRR, or internal rate of return, this takes the investments cash flows, purchase and sale price over a longer time horizon and gives an expected rate of return. Sometimes investors will go into an investment with the expectation of a certain IRR. If the investment meets the IRR, then they will go ahead, if not, they will pass. IRR is frequently used as a discount rate in calculating another number called the net present value (NPV). NPV is a way to discount future cash flows factoring in a discount rate. The discount rate, can be based on many things, generally the risk free rate (the rate that government bonds are paying) plus some other factors such as mortgage rates (the value you could get lending the money to someone else) and inflation (time value of money) are taken into account. Using a formula all the expected future cash flows are discounted using the discount rate and they yield a dollar amount. If the dollar amount is negative factoring in the discounted cash flows, this means that the investment will likely be worse than an equivalent risk free investment. If the value is positive it means the investment is better than a risk free investment (or it meets the investors required IRR). Generally the rule of thumb is that NPV has to be zero or higher to move forward with an investment. My explanation is not great, but I do have a video that does a better job explaining these things below, if you’re ready to dive into the technical weeds:
Property Management, Systems, and Employees
Lastly, what about management? Depending on how you set up your rentals you may need to hire an admin staff to manage it, cleaners to keep common areas or business offices in tip top shape, and have some tradespeople you trust to fix things when they break. As you build up a portfolio it might make sense to hire a property manager who manages everything. From finding new tenants to hiring the tradespeople and cleaners. For almost all types of real estate investing once you get to a certain level, property management becomes very important. There are property management companies which provide the service for a fee (usually around 10-20% of rent). This might make sense for you if you have one or two properties. But if you have a larger portfolio there comes a time where it makes sense to hire an employee to do this for you.
If you choose to go down this route, you’d be well advise to have a handbook that has phone numbers of tradespeople you trust, and step-by-step approaches on what to do in certain situations (or “systems”). It will be a lot of work, and you’ll learn as you go, but having a “run my life manual” can be extremely helpful for the people that work for you, and saves you the headache of having to approve a small expense, or screen every tenant, or deal with every small leak or lightbulb. I think building out this type of “systems” or “operations” manual early on is a very good idea, that way when you hire someone, or an employee leaves, you aren’t left hanging with no direction to give this person. Obviously, some situations are different but you can get as low level as you want, including the types of brands you trust or don’t trust when replacing broken components. Building something like this will make your life much easier before you hire someone, and will make the employees life easier when you eventually do.
Why Commercial is Worth it (Conclusion)
In conclusion, believe it or not this was a very brief and very light overview of how investing in commercial real estate works. The goal of my post was just to get you thinking about it and to somewhat de-mystify it. A lot of people will never invest in commercial real estate, or don’t even think about it, but it is frequently a better investment than residential real estate. But as with any thing that provides a higher return there is higher risk. It’s very mainstream to invest in residential real estate nowadays. The barrier to entry for commercial is a bit higher, and usually when there is a higher hurdle to jump over, that is the opportunity you should chase because it will keep your competition out. Simply by the fact that it’s a bit more challenging. Residential is quite frankly oversaturated with investors and the gaps in the market are very slim to the point where the only way to make those investments work now is to take on a lot more risk and oftentimes without a suitable upside.
No matter how you swing it nowadays, getting a profitable investment is going to take some work, and I hope that by bringing your attention to commercial real estate investing you might be interested in learning more about it. If you do I would highly recommend the b real estate podcast, they have a ton of episodes talking about commercial real estate, it is American so some of the rules will be different to Canadian rules. But just getting an understanding of the various ways people get creative with their investments is a huge leg up on the competition. Additionally, I would recommend talking to someone who is a commercial real estate owner and investor, they can be a bit harder to find, and I would recommend trying to find someone who is still active in their investments because they will likely have had to face recent hurdles that will be helpful to learn from in todays market. I’m also certain that there are Canadian real estate podcasts out there which have episodes talking to investors and they’re definitely worth checking out as well. As my final word of parting, if you do nothing else, you should just get started. People spend way too much time (myself included) over researching and reading for months or years without taking any action. Preparation is good, but don’t forget to put the things you learn to work! Thank you for reading and as always.
Don’t invest in stocks or real estate. I know, probably controversial, allow me to explain. I recently read a business book that really brought home an important point that has been living rent free in my head for a while. Investing in stocks (less so in real estate) when you’re young is not going to make you wealthy. If wealth happens to be your goal. Now allow me to substantiate my claim. Surely investing in stocks and real estate is a good idea, surely I should save money from my job and invest it? People get rich all the time investing in stocks and real estate, right? Well, that depends. If I spend 40 years saving a bit of money from my job every week, and retire with a million dollars or two, sure, maybe I’ve done well. But, the elephant in the room is always inflation, which will eat away at my buying power. The $1 million dollars 40 years from now, won’t be worth $1 million dollars in todays money.
Real estate is a bit better because the power of inflation is working for you not against you, it tends to be a bit of an “inflation hedge”. If you increase your power to pay down a loan over the years (i.e. earn more), the loan value 20 years from now will not be worth as much and you’ll have an easier time paying it off. For example, if you can borrow money at 0% forever but inflation is 2%, the loans value drops 2% a year. Hence why lenders tend to lose money in a hyperinflationary economy, while borrowers tend to benefit. A very important concept that is overlooked when giving retirement and investment advice is the time value of money. Basically, inflation. Also, inflation during a high inflationary time is deceptive. Because when you go through a few years of close to 7-8% inflation, and then drop down to 3% a few years later. In 5 years time since the start of the pandemic the compounded TOTAL inflation has been close to 20%. So if your stocks aren’t keeping up, you’ve at best broken even.
Whenever there’s a story of some 25 year old who made it big did they work a regular job for 40 hours a week, then diligently save 15% of their paycheque and invest in stocks, and boom 5 years later they’re a millionaire! Unlikely, if not impossible. There are sound statistics and facts showing that the people who are young (and also how many older people made their money) did so by building a business. The capitalist system is built around rewarding those who create something the marketplace wants. There’s only one Apple (inc.), but MILLIONS of us buy their products. Simple math says if you sell a million of something you’ll be a millionaire. In the system we are in you have to be a “producer” in order to make it big. Sure, maybe once in a blue moon someone hits it big on crypto (assuming they don’t lose it all in the next crash), or managed to time an investment that went up 10x in value. But the large majority of people who speculate on stocks hoping to get rich inevitably get burned, just ask my friends and I.
For some people, they may not have any ambition to be wealthy and they may just want to have a decent job, and enough money to have a decent life. But for the people who want to be wealthy, they have to realize a few things. 1. No one cares that you want to be wealthy. What can you do for me? That’s what drives buying decisions. Generally speaking, I don’t care that a corporation is profit motivated, I care about the thing I’m buying or the service they are providing me. Maybe, I make my buying decision emotionally because they have built a brand that makes what they are selling desirable to me. 2. No matter what business you’re in, you have to sell. Whether “selling” means getting to the top of search rankings, creating a marketing campaign, or paying for ads. You can have the best product in the world, but if no one knows about it, it’s as good as having no product at all. (Luckily, nowadays social media is a strong method of selling and brand awareness that is largely free, Google My Business is valuable, and word of mouth is also very much still alive).
There are more intricate rules and considerations to think about if you are building a business. Do you want to build a business that can eventually work without your inputs, would be nice huh? But you have to remember that at the beginning the business needs you to be the one forcing it forward, building it up, and doing the stuff that no one else wants to do. A thriving business isn’t magically going to appear on your doorstep because you “visualized it”. You have to be actively out in the world providing input to the machine so it can start cranking its gears. Spend less time thinking and more time doing. Speaking of stuff no one wants to do. That’s a great way to choose an avenue that is ripe for disruption. There are a million different businesses you could start, but it’s important to consider if there is a need in the marketplace (the world probably doesn’t need another personal trainer, or blog for that matter, owch…).
It’s a much better idea to begin a business in a market that doesn’t have a ton of competition, that being said, you’ll almost always find someone who’s “already doing it” and if that business is smart they’ll do their best to deter you from even thinking of competing. But if the barrier to entry is relatively high, and building that business would be “hard” and you think you could do it better, then you’ve got an opportunity to innovate. The higher the barriers to entry, the better the potential idea, you want to be in a space that is “hard” to work in (or where all the current options suck), because that will act as a moat to your business.
You also have to consider the scale of the business. Would it be feasible for this to be a national or international business? Or am I just going to open one restaurant on the street corner. Not saying you can’t have a thriving restaurant, but notice that the chains who are global have found a way to replicate their formulas using the franchise model. Again, depends on your motivations. Do you want to be global, or are you stuck thinking local.
As a bit of personal experience allow me to divulge a bit of an internal battle between two businesses. When I was originally thinking about real estate sales as a business, I was noticing a lot of the warning signs that this book pointed out and that I’ve mentioned above. Does the world need another realtor? Quite frankly no. Unless, you have a super innovate or weird business model, it’s an oversaturated market. Can the business be global? Not really, unless I was to start my own brokerage like Re/Max or Sotheby’s. Can I detach from the business in the future? Not really, unless I build a team of agents who handle all my clients for me, but even then many clients would likely just prefer to work with me if we have built up a relationship. Do I have control over my own brand? Somewhat, but also not really. I work under a brokerage company, and I have to use their brand in all my marketing. They are probably the one making the big bucks. 1400 agents under their belt. Yeah, that’s a nice business. But I will say, the owner/operators are VERY involved in the day to day operations, and the business needs their constant inputs to grow and build relationships otherwise it would likely fall apart and agents would begin to leave. But, eventually, they could train and hire people to handle their roles if they so desired, it’s a pretty well oiled machine.
Then I started to muse about my YouTube channel where I posted engineering content for a period of time and now sits at 25,000 subscribers. I decided against posting about real estate content on that channel in the worry that I would upset my current audience 99% of whom subscribed from engineering videos. So I started to post some real estate content on a second YouTube channel and I had this realization of how brutally limited my market is. If I’m just talking about “Mississauga Real Estate” MAYBE at most 1,000,000 people are interested. But considering the demographics of Mississauga and that most of them aren’t on YouTube daily, it’s probably closer to 100,000 people who are relatively active on YouTube. Of those people, VERY few of them will be buying real estate because the average price of a home is $1 million dollars, and most young “Mississaugite” is probably not thinking about buying (or selling) anytime soon. That leaves the intersection of my online, “social media” market in “Mississauga Real Estate” to at most maybe 1,000 people. What a terrible business and waste of time. (If I sold houses to 1,000 people I’d be laughing, but social media and real life are very different). AND YET, I’ve been to so many “marketing training sessions” harping on how you should be posting to social media daily and how making YouTube videos about real estate is “essential”. But the market is inherently limited, unless you are building a separate online media “brand”. One way to overcome this limitation would be to focus on a larger market, all of Canada for example. But then your strategy won’t be relevant to the hyperlocal markets that all of “real life” real estate lives in. Two streets in the same neighborhood have very different dynamics, and that expertise is very boring to everyone except the clients you are working with at the time. The upside is that even if you get 1 sale from social media marketing you’ll probably see an ROI since commissions in real estate are so high. Real estate is a relationship building business, an “in-person” relationship building business, a local business. So if you can simultaneously build a unique online media business, while also working on your local real estate business, sure go crazy. But I don’t think from a strategic perspective a social media strategy is a good use of time for the average realtor. You’re better off just picking up the phone and calling people.
Now let me analyze my Engineering channel. What a great concept. My target market is high schoolers and university students. Who just so happen to be chronically online and advertisers love selling to the young crowd. Universities and colleges have never been more desirable, they are degree printing machines in the modern era, so channels with “studies” as their focus have the opportunity to grow. I also found a niche in Mechatronics engineering, since there wasn’t really anyone making videos on the topic online, yet the google search queries were quite high. Again, perfect unmet market need/opportunity. I hardly realized all this at the time, and it took me about 4 years to really put this all together. As a business with growth potential, and something that actually meets the needs of a market, an engineering YouTube channel is not a terrible business plan at all.
Now, one of the challenges of building an “influencer” business is that you are often at the whims of an algorithm that can be challenging to predict. So you don’t REALLY control the means of production, and control is important in a business. Likewise, for real estate you could say I don’t REALLY control how many clients I can get, but in theory you have more options to gain some control over your real estate business than you do in an “influencing” business.
Additionally, you really need NUMBERS for it to be a viable business model. Over the past year I got around 750,000 views, which worked out to an average of $300/month from ad’s that played over my videos. Now an extra $300 a month is fricken sweet (pardon my French). Especially considering that I’ve all but stopped posting to that channel and 99% the views are coming from old videos. But unfortunately, no one can live on $300 a month. If I didn’t know better I’d say this YouTube thing is screaming into my face “HEY THERE’S OPPORTUNITY HERE!” And you know what, it might be right.
The creator business model almost always has multiple components for generating revenue, and like any sound business requires a component of sales. Whether that’s building a product and selling something you think your audience may want, creating a course for people to take, or doing a “brand deal” and selling someone else’s product during one of your videos. Building an online brand requires a little more than just ad revenue to be sustainable. But the great thing is, that if there is demand for your content, those other things can often fall in place. Some other positives is that your reach is global, you have a lot of creative control, and once you make a video once it can continue to get views (hypothetically) forever. Creators often branch out to build traditional businesses around the “influence” they hold. Anything from merchandise, to experiences, to streaming platforms of their own, or “exclusive content”.
So, where do we go from here. Hopefully amongst all the rambling I was able to put across the idea that if you want to make money, you have to make something that other people (“the market”) wants. Once you’ve made a chunk of money, THEN I would highly recommend stocks as a passive income and wealth preservation tool (but if you don’t have any grandiose plans then, yes, please save and invest for your future). If you are doing something because “you love it” or “you want to work for yourself”, you’re doing it wrong. You work for the customer, you work for your audience. Once you meet their needs, then and only then will they help you meet yours. The world is a selfish place, work selfishly hard to build something other people want or need and become great at it. How do you know if other people want something? Throw it into the world and see what happens. Call up your friend and see if they’ll give you a $20 deposit for a service business, then provide the service and get feedback. Call 20 professional’s or small businesses in your market and ask them what they struggle with, then solve their problem. Look at your YouTube comments and find a common thread amongst requests and complaints that can help guide your future content. It’s not “what you can do” or “what skills do you have”, but “what can you do for me”. Give the people what they want.
