Commercial Real Estate Decisions Driven by 'Feel and Gut,' Leading to Persistent Market Inefficiency

Commercial real estate investment decisions are often swayed by subjective factors rather than purely objective analysis, leading to inherent market inefficiencies, according to a recent social media post by Brandon Avedikian. Avedikian highlighted the paradox where investors can have diametrically opposed views on the same deal, only to reverse their opinions on a similar subsequent opportunity. This suggests that non-quantifiable elements significantly influence high-stakes investment choices.

"Investor A will look at a deal and love it, while investor B will look at the same deal and hate it. Then another deal comes along that’s basically the same, and their opinions completely flip," Avedikian stated. He concluded, "Commercial real estate investing decisions are made much more on feel and gut than most people think, driven by reasons that are often intangible. That’s why the real estate market is inefficient, and always will be."

Experts and academic research largely corroborate this perspective, noting that real estate markets are generally considered less informationally efficient than financial markets. Factors contributing to this inefficiency include the heterogeneous nature of real estate assets, high transaction costs, regulatory complexities, and significant information asymmetries. Unlike stock markets, real property transactions are often infrequent, and properties possess unique characteristics, making direct comparisons and rapid price adjustments difficult.

A meta-analysis on real estate market efficiency confirmed that while real estate stock markets (like REITs) tend to be more efficient due to greater information richness and trading density, the broader physical real estate market exhibits persistent inefficiencies. This is partly due to the localized nature of real estate, specialized knowledge requirements, and a limited number of buyers and sellers, which can lead to prices not fully reflecting all available information. The "feel and gut" aspect described by Avedikian aligns with how investors navigate these opaque and complex conditions.

The influence of subjective judgment is further compounded by the unique characteristics of real estate, where location, property specifics, and even the negotiating dynamics can introduce non-rational elements into valuation. This ongoing inefficiency, while posing challenges for pure analytical models, also creates opportunities for informed investors who can leverage their experience and intuition to identify mispriced assets.