Case Study: Supply vs Demand Sensitivity

Anybody can buy market exposure and rise with the tide. But the best investors make a heck of a lot more money, and they do it by being consistent over time. That requires relentless focus on supply and demand.

 

It seems simple. When demand is growing faster than supply, prices will rise, and vice versa. At Alliance, the specialty medical properties niche is our bread and butter. We understand supply and demand better than competing investors do, so we have an enduring advantage.

 

But understanding supply and demand lets us branch out to other sectors, too. Sometimes it helps us snap up big winners. One of my favorite Alliance investments is one we made years ago in a San Diego supermarket.

 

Located downtown, this property immediately stood out. Supermarkets need a lot of floor space, and a heavily-built-up neighborhood with zoning restrictions meant that supply was constrained. At the same time, rising population density meant increasing demand for supermarkets.

 

A great property can be a bad investment if the price is too high. Fortunately, this gem of a property was disguised by some minor blemishes. With the tenant’s lease nearly expired, some investors worried about vacancy risk. The decor and design of the market was not new or flashy, and that might have seemed like a risk in a growing upscale neighborhood. the property also needed a new loading dock and had some plumbing issues.

Our analysis told us that supply constraints outweighed these minor flaws. We could lose the current tenant, but then again, why would they leave? And even if they did, the area needed grocery stores -- somebody else would fill the vacancy. Minor issues like design, decor, plumbing issues, and loading dock problems were all manageable. If anything, they helped us by slowing down other potential buyers.