An economic moat is a business’s ability to preserve competitive advantages over its competitors as a way to maintain its market share.
Understanding the Economic Moat
This term was popularized by Berkshire Hathaway CEO Warren Buffet, who viewed a business as a medieval castle. Inside the business, like a castle, is wealth and prosperity, so you must build a moat to protect yourself from outsiders.
A competitive advantage is any factor that will allow a business to provide a good or service similar to its competitors while outperforming those competitors. An example of this in commercial real estate would be if a company can provide the best methods of sale or lease in a particular area or sector.
Building enough of an economic moat can lead to a monopoly of an industry. However, the competition will see your boosted profits and do its best to catch up. This can lead to a company’s economic moat shrinking.
How to Create an Economic Moat
There are many ways a company can create an economic moat. Below are a few examples of how a moat can be made:
- Cost Advantage
- Size Advantage
- Production Advantages (better quality products, etc.)
- Consumer Advantages (switching costs, etc.)
- Intangibles (patents, brand recognition, etc.)
What About Commercial Real Estate?
CBRE Group (CBRE) and Jones Lang LaSelle (JLL) have the biggest economic moats in the commercial real estate industry. The Morning Star downgraded their moat size from wide to narrow in 2019 stating, “We still believe these companies have robust competitive advantages […] but we are no longer confident that excess returns will persist for 20 years.”
They point to the cyclical nature of real estate and the influence technology may play in the future of the industry as the reasons why they lowered their economic moat rating. Despite this lowering, they stay sure that they’ll keep a competitive advantage for the next 10 years.