Case Study: Disruption in an Unexpected Place – Faropoint

Disruption in an Unexpected Place 

When investors think about disruption, they naturally gravitate toward the companies creating it. Artificial intelligence, automation, robotics and new computing architectures are obvious examples because technology is both the catalyst for change and the investment itself. 

But disruption does not always require investing directly in a disruptive company. 

Sometimes technology changes the economics of a traditional industry. It allows an operator to see information others cannot see, process opportunities more efficiently, or manage complexity that has historically prevented a market from operating at scale. The underlying asset may remain entirely conventional, while the way of investing in it becomes anything but. 

This is what made an opportunity identified by Richter Family Office’s Real Estate investment team particularly interesting. 

The manager that they came across (Faropoint Ventures) operates in a decidedly “old-economy” business – they buy, manage and optimize warehouses. More specifically, they acquire small-bay industrial properties of approximately 20,000 to 100,000 square feet, typically divided into units ranging from 2,500 to 15,000 square feet, across the United States. The buildings themselves are traditional, serving local distributors, contractors, suppliers, light manufacturers and other businesses requiring industrial space. 

The disruption sits one layer removed from the asset itself 

What our team found interesting is that Faropoint uses proprietary technology and AI to access a highly fragmented segment of commercial real estate that has historically been difficult for institutional investors to operate in efficiently. The technology itself does not create the investment opportunity – it changes Faropoint’s ability to identify, evaluate and capture it. 

A market that has historically resisted scale 

Part of the attraction of small-bay industrial real estate is precisely what has made it difficult for large institutional investors to access. 

The U.S. market includes approximately 208,000 small-bay industrial buildings representing roughly US$1.1 trillion of real estate. Approximately 77% are privately owned, and more than 90% of transactions have historically been below US$12 million. 

For institutional investors, the challenge is scale. Buying hundreds of relatively small properties from private sellers, assessing local rents and tenants, and managing thousands of individual decisions creates significant complexity. 

The opportunity, therefore, is not that other investors have overlooked small bay industrial real estate. It is that this particular part of the market has been difficult to access efficiently at scale. 

Technology has the potential to change that. 

How technology changes the investment equation 

Faropoint has built its investment platform around solving this problem. 

Its proprietary FarOS system brings together acquisition opportunities from local teams and a network of more than 800 brokers, giving Faropoint visibility into approximately US$40 billion of annual deal flow. More than 75% of its transactions are reported as sourced off-market and 85% from private sellers or owner-users. This breadth of deal flow allows Faropoint to be highly selective, closing on approximately 2% of the opportunities it evaluates, and pursue opportunities with the most favorable balance of fundamentals, value-creation potential and pricing. 

The technology also extends beyond sourcing. Faropoint has developed tools to assess market rents and tenant credit, while its platform centralizes property and lease information to support underwriting and ongoing asset management. 

The advantage is not AI in isolation. It is the combination of technology, proprietary data and scale. 

As Faropoint evaluates and acquires more properties, it collects more information. That data can inform underwriting, improve decision-making and help Faropoint respond more quickly to new opportunities. Its database now incorporates approximately 300,000 leases. 

The result is a potential flywheel: 

More transactions → more proprietary data → better-informed underwriting → faster decisions → greater access to transactions → more data. 

A second-order disruption opportunity 

It is in the way that Faropoint accesses the underlying investment opportunity set that fits it within our broader disruption thesis. 

The first-order beneficiaries of AI are relatively easy to identify: semiconductor manufacturers, hyperscalers, model developers and software companies building AI applications. 

But the second-order effects may be much broader. 

As technology makes it easier to gather data, automate analysis and manage complexity, markets that were previously too fragmented or operationally intensive can become accessible in new ways. The opportunity shifts from owning the technology itself to acquiring and operating an asset whose economics can be improved through technology. 

Faropoint provides a tangible example. 

The warehouses have not changed. The investment still depends on traditional real estate fundamentals such as purchase price, occupancy, rents, financing costs and eventual sale value. What has changed is the toolkit available to the investor making thousands of investment and operating decisions across those assets. 

Where technology meets an attractive entry point 

Technology made Faropoint interesting to our investment team. But the underlying investment opportunity was what made it compelling. 

The current interest-rate environment in the United States had created an attractive entry point for buyers. But the opportunity extended beyond pricing. Small-bay industrial properties are often under-managed, leaving room to fill vacant space, bringing rents closer to market levels and make selective improvements. 

Faropoint was also not pursuing this strategy for the first time. Now in its fourth vintage, the firm had developed a repeatable approach to identifying and realizing these property-level opportunities. 

There was also another potential source of value: acquiring individual buildings and assembling them into larger portfolios that could ultimately attract institutional buyers. 

In other words, the investment did not require the market to bail it out. Faropoint had a clear and repeatable plan to create value within the properties themselves. 

Where Technology Meets Market Inefficiency 

This combination of technology and market dislocation is what makes the opportunity particularly interesting. Technology can improve execution in almost any market. But in a fragmented and dislocated market, its value may be greater because identifying and selecting the right opportunities becomes more important. 

Small-bay industrial real estate is almost deliberately unglamorous. Warehouses remain warehouses. Yet the same fragmentation that historically made the market difficult for institutional investors to access may create the inefficiency that a technology-enabled operator can exploit. 

For Richter Family Office, Faropoint represents a useful counterpoint to more obvious disruption investments. It provides exposure to tangible, income-producing real estate while seeking to create value through sourcing, rent normalization and aggregation, supported by technology designed specifically for those tasks. Our underwriting assumptions target a 14% to 16% annualized net return while recognizing the leasing, financing, tenant, execution and exit risks required to achieve it. Notwithstanding these execution risks, we found the investment to offer an attractive risk/return profile relative to other investment opportunities. 

Disruption does not always replace the traditional economy. Sometimes it simply allows the traditional economy to be understood, priced and operated differently. 

Key Takeaways 

• Disruption can occur within traditional industries. Technology can change how conventional assets are sourced, evaluated, managed, and scaled without changing the underlying asset itself. 
• Market fragmentation can create opportunity. In small-bay industrial real estate, technology and proprietary data may help investors access a highly fragmented market that has historically been difficult to operate in efficiently at scale. 
• AI can create second-order investment opportunities. The beneficiaries of artificial intelligence may extend beyond technology companies to businesses and assets whose economics can be improved through better data, automation, and decision-making. 
• Technology does not replace investment fundamentals. Real estate outcomes continue to depend on purchase price, occupancy, rents, financing costs, execution, and exit values. 
• For families, disruption can provide differentiated sources of long-term return. Within a diversified portfolio, opportunities such as this can offer exposure to innovation while remaining grounded in tangible assets and traditional investment fundamentals. 

Important Note: The investment discussed above is provided for illustrative purposes only and was selected solely to illustrate the theme of technology-enabled disruption within a traditional real estate asset class. It is not intended to be representative of all investments considered, recommended or made on behalf of clients. The investment remains outstanding, and references to target returns, underwriting assumptions and expected outcomes reflect expectations at the time of investment and do not represent realized investor returns. Real estate and private market investments involve risk, may be illiquid for extended periods, and may not be suitable for all investors. Investors should carefully consider their objectives, risk tolerance and circumstances, together with their professional advisors, before making any investment decision.
 

The Richter Business | Family Office group is comprised of Richter LLP and its subsidiary, RFO Capital Inc., a registered portfolio manager, investment fund manager and exempt market dealer. Richter LLP is an independent firm that provides family office, accounting, tax and business consulting services, with wealth, investment advisory, portfolio management, investment fund management, exempt market dealer and consolidated wealth reporting services provided via RFO Capital Inc.