People rarely talk about insider information and the role that plays in real estate development. That is because capitalizing on insider information – i.e., insider trading – is considered highly illegal and violates all securities laws. This is true in both the public and private markets in which stocks are other securities are trades based on material, non-public information.
Indeed, in the context of private markets such as private equity or venture capital, the rules against insider trading still apply.
And yet, many real estate developers still quietly tout their ability to access insider information. So, what gives?
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What is Insider Information in Commercial Real Estate?
When real estate developers refer to “insider information,” they are really talking about the information they have gleaned from either a) their personal relationships; b) their due diligence on markets; or c) their proprietary data sets. This “insider information” may be relevant to how a property’s value or investment potential could change over time.
In reality, a lot of this information is publicly available – it is just that people do not know how to source it or interpret it accurately.
For example, a real estate investor who is closely monitoring the planning and economic development policies in a specific municipality might know that the City recently embarked on a neighborhood planning process that contemplates a large swath of area to be rezoned for higher density, mixed-use development. They might also know that the state is contemplating extending a transit line to that area, making it more readily accessible to the masses. The state or municipality might have already secured the federal funding needed to bring that to fruition.
In this example, there are dribs and drabs of information available in the news, via City Council hearings, or otherwise – but individuals must connect the dots to see how that might impact property values. While a rezoning of that neighborhood might still be more than a year away, a savvy developer might embark on a land assembly strategy in order to capitalize on the new zoning when that time comes. By getting ahead of pre-rezoning, the developer can likely acquire the parcels for less than they would be worth once re-zoned. After the re-zoning, the properties will likely jump in value, even if the new owner does nothing.
Here, we see how a developer can capitalize on “insider information” without breaking any securities laws. The developer pays close attention, evaluates market conditions, and then connects the dots to see where future opportunities may exist. Successfully doing so helps to maximize profits. And it is not only completely legal, but an important way in which savvy sponsors can gain an edge in a competitive market.
Using this same example, where a developer might run afoul is if he, for instance, had a friend who worked in the planning department who only told him about the planned up-zoning and transit investments, and then he started acquiring properties before this information became publicly available.
But in most cases, the information is already out there – even if in piecemeal fashion. Someone just needs to know how to gather that data, interpret it, and then predict what impacts it might have on the local market or specific property value.
Watch as company founder, Ari Rastegar, discusses how he legally uses 'inside information' as a competitive advantage.
Ways to Legally and Ethnically Use Market Intelligence
In commercial real estate, the term “insider information” could easily be swapped for “market intelligence.” This is really what we are referring to. When we re-frame, it becomes easier to see the many ways real estate developers can capitalize on insider information:
1. Market Research:
Developers can conduct thorough market research to understand local trends, supply and demand dynamics, and upcoming developments that could impact the value of their projects.
For example, at Rastegar, we are all-in on the “Golden Triangle” of Texas – focusing on an area that spans from San Antonio to Dallas-Fort Worth to Houston with Austin in the center. Based on our research, we know that this is one of the fastest growing corridors in the world. We routinely track the companies moving their U.S. headquarters to this region and analyze the impact this will have on housing prices, demand for office space, need for industrial, and more. That then informs our acquisition strategy and ultimately, what we believe can be built to maximize the profitability of those sites.
2. Network Building:
Building relationships with key players in the industry, such as brokers, property owners, and government officials, can provide developers with valuable insights and access to off-market deals.
Indeed, nearly every major deal that we have done at Rastegar started with a personal relationship (or came to us through a personal relationship). Our team has deep roots in the Austin, Dallas, and San Antonio markets – these are areas where we were raised, went to school, and are currently raising our families. We have lived here. We have boots on the ground. We are usually only one-degree of separation from most property owners. By fostering these deep relationships, we learn about potential deals and market opportunities that would be harder to come by for an outsider.
Let us say there is a property that we love. If we do not already have a relationship with that owner, or through our extensive network, we can pick up the phone and call the person directly. We set out to forge new relationships. We might find, for instance, that the owner is on the verge of retiring and will soon be considering a land sale. By getting to know that owner, we can learn their motivations and structure a deal that works for both of us. In turn, that property may never go to market; we will scoop it up before it becomes publicly available.
3. Due Diligence:
Conducting thorough due diligence on potential acquisitions, including legal, financial, and market analysis, can help developers make informed decisions and mitigate risks.
At Rastegar, we have looked at hundreds of deals and have been engaged in billions of dollars’ worth of development projects. We have aggregated data about each of these properties and transactions into a database. We then use proprietary analysis processes and metrics that we have created that help us to streamline our due diligence process and evaluate opportunities more efficiently and more accurately.
To be sure, our datasets are often built using publicly available transaction and property information but the datasets we create, and leverage in our deal-making, are anything but.
Examples of Proprietary Datasets
Each real estate investment firm has its own approach to data collection and utilization, the same is true for Rastegar. These proprietary datasets can be used to gain insights and competitive advantages in the market. They can be used to identify trends, to make more informed decisions, and to optimize investment strategies.
Here are some examples of the types of proprietary datasets that real estate developers might create:
1. Market Research Data:
Developers can collect data on local market trends, including supply and demand dynamics, rental rates, vacancy rates, cap rates, and demographic trends. This data can help them identify market opportunities and make strategic investment decisions.
2. Property Performance Data:
Developers can track the performance of their properties over time, including rental income, occupancy rates, operating expenses, and property values. This data can help them identify trends and make more informed decisions about future investments.
3. Competitor Analysis Data:
Real estate developers can also gather data on their competitors, including their property portfolios, investment strategies, and market positioning. This data can help them ID competitive threats and opportunities for differentiation.
4. Tenant Data:
Developers can collect tenant data, including their demographics, preferences, and leasing histories. Those new to a market might rely on tenant data provided by brokers (again, emphasizing the need to have strong broker and other local relationships). Tenant data can help developers better understand their target market and tailor their properties and services to meet tenant needs (which will result in a more profitable property!).
5. Financial Data:
Developers can track financial metrics such as cash flow, return on investment, and overall financial performance. This data can help them assess the profitability of their proposed projects and make strategic financial decisions accordingly.
Creating and maintaining proprietary datasets requires careful data management practices, including data collection, storage, analysis, and security. At Rastegar, we are always researching new approaches to systematizing our data to make it even easier for our due diligence and development teams to utilize to help our company scale.
Combining “Insider Information” with Public Datasets
Where things start to get even more interesting is when you start to take proprietary datasets and then layer in publicly accessible information.
For example, we can overlay our proprietary data with property valuation data, zoning and land use regulations, and environmental/geotechnical information (e.g., information about flood zones, soil conditions, and other environmental hazards) to determine the development potential of a specific parcel.
By leveraging public information in these ways, we can make more informed investment decisions, mitigate risks, and increase the profitability of our development sites.
Using Insider Information to Make Informed Decisions
Someone who gathers information and then connects the dots, like we have described above, can make certain presumptions about development opportunities. You could call this development or market intuition – but it is more than intuition; it is really following the data and understanding the market to make highly informed presumptions about what’s to come.
At Rastegar, we have built a track record of making informed decisions.
Case and point: a few years ago, it was publicly known that Elon Musk was shopping around Texas for Tesla’s new “Gigafactory”. We did our research and started to really understand the company’s space requirements. Based on our interpretation of both public and “insider” information, we made a presumption that the Gigafactory could very well be coming to Austin. There was an area near the F1 racetrack that could be an ideal site for the Gigafactory.
Based on this presumption, we went after a 50-acre site right in that same vicinity. Our hypothesis was that the Gigafactory could likely be in the general area, and soon, there would be increased demand for industrial space to support the Gigafactory and related businesses. We also knew that it was located in an Opportunity Zone, which meant that if we successfully rezoned and redeveloped the property and then held it for 10 years, there would be significant tax benefits – something that would tremendously boost the property’s value upon exit.
A month after we closed on the property, Tesla announced it was moving the Gigafactory right where we presumed they would. Our newly acquired property’s value immediately increased significantly.
We went on to rezone the site and are now under construction on 600,000 of industrial, which would have been nearly impossible to get approved had these stars not aligned the way we anticipated they would. We pre-leased the first building within a few months of announcing construction and earlier this year, obtained our first certificate of occupancy.
That is how you make the most of “insider information” in commercial real estate.
Here is another example. We have been monitoring things closely as it appears casinos may soon be coming to Texas. We are not sure this will happen, but there are a few signs that point to it being a possibility. For instance, the Adelson family recently acquired majority ownership of the NBA’s Dallas Mavericks. Miriam Adelson is one of the largest shareholders of the Las Vegas Sands. Shortly after the Adelson’s acquired the Mavericks, an entity of The Sands acquired 250 acres of land in the Dallas suburb of Irving – an area more than four times the size of the 63-acres in Las Vegas where The Sands also built The Venetian, Palazzo and other hospitality properties. It is also well-located near the Dallas-Forth Worth International Airport.
So, no, we do not know for sure that casinos are coming to Texas. But there has been a lot of activity with signs pointing to it being a strong possibility. What this means for our future development in the area remains to be seen, but it is something we are watching very closely so we are prepared to capitalize when the right time comes.
Conclusion
There are a lot of misconceptions around “insider information” in commercial real estate, but what we mean by insider information is really the use of privately-obtained market intelligence. We use this information, alongside public data, to inform our target markets, deal negotiations, pricing, timing of transactions, redevelopment strategy, and more.
Our ability to do so is part of our “secret sauce” at Rastegar. It may be why some have referred to Ari Rastegar as the “Oracle of Austin” in terms of real estate development. While we are honored by the designation, the reality is that we are just highly methodical about our acquisitions and development process in a way that puts us ahead of others.
Interested in learning more about Rastegar? Contact us today. Our team always welcomes the opportunity to discuss our investment strategy, our platform, and upcoming projects that may be of interest to accredited investors and other high-net-worth individuals.
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