Small is Beautiful

In his groundbreaking book Small is Beautfiul, E.F. Schumacher criticizes the “cult of bigness” and the effects this apparent cult has had on seemingly every component of our organized world. Nowhere, it seems, is this cult more blinding than the ever-evolving field of economics.

In the classical economic tradition, firms have every incentive to continue consolidating and increasing in size. “Big firms are more efficient”, you will often her economists claim. By becoming more massive, these firms have more leverage, they have access to more capital, and—frankly—they can do more things.

But, eventually, there comes a point where the cult of bigness can no longer be sustained. Had the Titanic been just a bit smaller, it may have been able to avoid a collision with the infamous iceberg altogether. Sure, the aptlynamed ship had a tonnage capacity unmatched by an of its counterparts at the time. But if a ship cannot turn to avoid a fatal blow, it’s really not as impressive as one might have initially assumed (perhaps instead of Titanic, Lehman may have been a better namesake).

In the world of commercial real estate, being able to turn is unavoidably important. In this fast-paced industry, changes can occur incredibly quickly. The smaller the ship, the easier it will be to navigate choppy waters, so long as there is no wave causing the ship to capsize. Keeping this analogy and the spirit of Mr. Schumacher in mind, it might be time the industry stopped and realized that quality is something that is often better achieved on a much smaller scale.

Preparing for the Future

There are many reasons a commercial real estate firm—or any for-profit business, for that matter—might feel the need to grow. Usually, the need for growth is fueled by a desire to have greater revenues. The desire to have greater revenues, naturally, is connected to the desire for greater profits, though these things do not always go hand-in-hand. Regardless, growth is a natural instinct for most businesses and in some cases, following this instinct is good.

But even more than increasing revenues (or profits), businesses want to grow because they want to prepare themselves for the future. They fear a future shortage where their current clients will no longer be around and to prepare for this, firms will constantly be looking for newer clients to replace them with.

Again, it becomes easy to see how the cult of bigness can cause us to overlook what we already have in the status quo. If a firm is always thinking about the next tenant, the next investor, or the next customer, those they already have will almost always be neglected. The virtue of a big firm is that it has the capacity to move mountains, but rarely does this mountain-moving actually come back to benefit the client.

In the end, what seems to restrain unlimited growth—and keeps Jeff Bezos’ wealth still below one percent of the national total—is specialization. When a firm is small, it can adapt—in other words, specialize—in ways that larger firms cannot. It can spend time thinking about clients, rather than thinking about markets. It is the reason you will always choose your mom-and-pop Italian restaurant over Olive Garden, even if their mass-produced breadsticks are still pretty good.

And in the commercial real estate, this shift in power back to the little guy isn’t theoretical: it’s real.

Smaller, specialized firms have come to dominate this space and interrupt the boring cash flows of the “Old Guard.” The introduction of new capital-raising systems, like digital crowdfunding, has helped extend this once rather elitist industry to the masses and has helped democratize the broader industry as a whole. Firms that are equipped with the freedom and flexibility to rise to these new challenges have been able to benefit, tremendously. Those who lack freedom and flexibility have experienced stagnated growth, at best.

So before assuming that Goliath will always triumph over David, it is important to take a closer look. A bunch of zeros on a dotted line can make it easy for anyone to lose focus. But with the rise of disruptive, innovative, and client-focused firms, it becomes clear that maybe being bigger isn’t always what is better.

The benefits of operating via an economy of scale can only go so far. In the digital era, structural power is being returned to small-scale specialists across many industries. The cult of bigness is a relic of yesteryear.

Small is, in fact, as beautiful as ever.

Smaller, specialized firms have come to dominate this space and interrupt the boring cash flows of the “Old Guard.” The introduction of new capital-raising systems, like digital crowdfunding, has helped extend this once rather elitist industry to the masses and has helped democratize the broader industry as a whole. Firms that are equipped with the freedom and flexibility to rise to these new challenges have been able to benefit, tremendously. Those who lack freedom and flexibility have experienced stagnated growth, at best.

Again, it becomes easy to see how the cult of bigness can cause us to overlook what we already have in the status quo. If a firm is always thinking about the next tenant, the next investor, or the next customer, those they already have will almost always be neglected. The virtue of a big firm is that it has the capacity to move mountains, but rarely does this mountain-moving actually come back to benefit the client.

This was the taste I needed to realize that brokerage wasn’t for me. I liked the investment side much more than brokerage. After this first bit of success, I went on and bought another piece of land in a town north of Chicago. I built another industrial building, brand new and with all cash. I immediately leased the property to a building supply business, and with no mortgage on the property, the cash flow came rolling in. Being a developer was a great thing, indeed.

Working Through My First Economic Downturn

Then, the music stopped. It was 1991 and the nation was thrust into the Gulf War. Lenders drastically pulled back. If you wanted to get a deal done, you’d have to fund it with your own cash. While I had realized some initial success as a developer, I was in no position to continue doing all-cash deals. So I took a break and didn’t do any business for a little while.

A few years later, I decided that it was too difficult to be a developer. Developing takes too much time and energy. You have to put all of the pieces of the deal together. You have to find the land, hire an architect, go to the city to get your zoning and permitting approvals. Where we live in Chicago, you also have to get approval from the water district because of flooding issues, which often means installing expensive on-site stormwater detention systems. Now you’re having to coordinate with civil engineers. It’s a lot to manage.

Buying a building is much, much easier.