Know Your Customer

KYC is well known in finance. Sponsors, the smart ones, are cognizant and compliant with KYC in investor relations. KYC helps to keep the bricks steady. This we all know. But let’s shake things up for a minute and explore KYC in the context of who you’re building for.

A scroll down LinkedIn and you will see many instances of prompt and pretend—explaining why this unit is leasing or that development is selling. The one thing the majority of promptenders fail to spot and expound on; what is driving the sales or leasing. Quite simply, KYC is key for “compensation”— ROI. Builders building smaller units aren’t “going against the trend” they know their customer, very well, and they are building for them. Build it and they will come? That happens only when you know who “they” are. Not knowing your customer is the sure-fire way to being nothing of note to anyone — a commodity that gets traded on a whim. The ones who do come, are there to see look around, there is not real intent or interest to transact unless they’re heavily incentivized to act. Nothing you have built addresses pain point; it’s selling features not solutions.

The promptenders love to point at compact units outperforming in a market that’s supposedly starved for space. Studio City, Los Angeles is the case study making the rounds. Look closer and the pattern isn’t about square footage at all—it’s about who those square feet were drawn for.

Studio City has been an entertainment-industry hub since the 1920s, and that history didn’t just shape the neighborhood’s character, it shaped its buyer and renter pool. The market today still skews toward the actors, writers, and industry professionals who helped define the area’s identity, and the current rental stock reflects it: boutique buildings with fewer than 50 units, sitting alongside mid-century product, built for the transient creative and working professional rather than the family rooted in a school district. Rent data backs up who’s actually filling those units—Studio City is a magnet for established professionals seeking quality homes in a prestigious, walkable location—with a healthy share of that stock deliberately kept compact, close to Ventura Boulevard, and turnkey for people who move for a project, a contract, or a season rather than a decade.

That’s not a shrinking-unit trend. That’s a sponsor who did the KYC work, identified a customer who values proximity and flexibility over square footage, and built a product that speaks directly to them. The small unit wasn’t a concession to the market. It was the market.

Flip to the luxury side and the logic holds, just inverted. While generic Class A product sits soft in plenty of markets, track-adjacent residential communities built explicitly for car collectors and motorsports enthusiasts are moving. The Thermal Club, outside Palm Desert, is the clearest example: homes built around a private test circuit the way estates are built around a golf course, each with ground floor garage space designed for a car collection and full mansion-grade living above it. Multi-million-dollar homes there aren’t selling despite an unconventional premise—a 20,000-square-foot home on the property recently traded for $6.5 million—they’re selling because of it. The buyer isn’t shopping for bedrooms and bathrooms first. They’re shopping for a place to keep and drive their collection, with the house built around that need rather than the garage bolted onto a standard floor plan as an afterthought.

That’s the same KYC discipline as Studio City, just at the opposite price point. Nobody built a spec mansion and hoped a car guy would show up. The developer identified the customer, understood what they valued, and built the physical product—right down to garage clearance and track access—to match.

Two boutique examples make the case, but the argument needs a control group, and office gives you one. US office is the asset class that most clearly built for a customer who no longer shows up the way the pro forma assumed. National office vacancy sat at 17.6%–17.8% through the first half of 2026, still near levels not seen since the early-1990s savings and loan crisis, with average office attendance hovering around 55% under Kastle’s Back-to-Work Barometer. That’s not a rate problem. It’s a product built for a five-day-a-week, desk-per-head customer who, in aggregate, no longer exists in that form. The floor plates, the parking ratios, the elevator banks—all sized for a workforce assumption that shifted out from under the building.

Run the same asset class through a market where the customer didn’t change, and the numbers flip entirely. Tokyo’s central five wards closed Q1 2026 with office vacancy around 2.2%, and Grade A vacancy in prime districts like Otemachi and Marunouchi near 1%, with rents climbing to an 18-year high. Japan’s corporate culture never broadly shifted to hybrid the way the US did, so the office product built for an in-person workforce is still landing on a customer who still functions that way. Same asset class, same square footage logic, opposite outcome—because one market’s product still matches its customer and the other’s doesn’t. Notably, even within Tokyo, brand-new buildings with less differentiated design are running vacancy above 20% while fully-leased trophy assets sit near zero—the same KYC gap shows up inside a single healthy market once the product stops being distinct to a specific tenant.

Small-bay industrial and data centers prove the positive case at scale, not just in one-off developments. Small-bay space under 50,000 square feet runs a national vacancy rate around 3%–5%, roughly half the broader industrial market, precisely because it’s built for a known, recurring customer: HVAC, plumbing, and electrical contractors, auto repair shops, and last-mile distributors who need drive-in bays, paved yards, and proximity to the residential customers they serve. Developers aren’t guessing who shows up. Data centers tell the same story on the institutional end. Atlanta closed 2025 with vacancy near 2% and net absorption of roughly 456 megawatts, and much of the capacity now under construction across the market is already pre-leased to hyperscale and AI tenants before it’s built. Nobody is speculatively building a data hall hoping a tenant appears—the customer is identified, their power and connectivity requirements are known in advance, and the building is engineered to that spec before ground is broken.

Put side by side, the pattern holds across four very different asset classes: office in the US underperforms because the customer moved and the product didn’t; office in Tokyo holds because the customer never moved; small-bay industrial and data centers outperform because the sponsor knew the customer before pouring the slab. That’s not one cherry-picked example of good underwriting against the field. That’s the same variable—customer identity—determining the outcome in asset class after asset class, market after market.

Most of what’s sitting on the market and getting blamed on rates or “the trend” wasn’t purpose-built for anyone. It was built to a pro forma, sized to a comp set, and finished to a generic buyer persona that doesn’t exist in any specific submarket. It doesn’t repel anyone, but it doesn’t speak to anyone either. That’s the commodity trap—foot traffic without conviction, tours without transactions, unless the sponsor buys the activity with concessions.

Soothing the gripes in real estate is not just about rates. It is about doing away with cookie cutter pro formas and underwriting and doing the creative work to solve the actual problem. Real estate is, at its core, a creative business. The lazy sheep who complain of their wool being heavy are not up for this challenge. But those shepherding solution driven value in the built environment are and, regardless of what trend may suggest, more capital will start flowing in this direction. That's not an if, but when.