Magazine article Real Estate Issues

Focus on REITs: From Evolution to Revolution

Magazine article Real Estate Issues

Focus on REITs: From Evolution to Revolution

Article excerpt

The near-demise of the commercial real estate industry in 1990 was a watershed in the evolution of the business. The excesses of the 80s not only resulted in the greatest losses ever suffered by the lending community, but they also eliminated the primary role played by banks, insurance companies, and savings & loans in the financing of real estate.

With traditional sources of capital effectively out of the business, the industry was forced to approach the public capital markets for both debt and equity financing. The capital markets allocated funds to publicly traded companies, but on terms no longer exclusive to the attributes of a single asset class. The criteria for debt and equity execution shifted from evaluation of a specific asset to the assessment of a company and its ability to execute its strategies.

The vehicles created were variations on the REIT template created in 1960 but not fully accepted until the early 90s. As these entities were launched, easily accessible capital created public real estate companies with size and sophistication not previously seen. Far from being merely an evolution in financing, the shift to public ownership has set in motion a process of consolidation that represents a revolution on the landscape of commercial real estate.

Capital intensive industries have traditionally been dominated by a few, very large, very efficient players. Auto, steel, aluminum, and semiconductor manufacturing, as examples, all have evolved from highly fragmented groups to oligopolies as capital requirements make greater demands on ownership. The real estate industry, although capital intensive by nature, has historically been highly fragmented and local in practice. This fragmentation contributed to wide, cyclical swings and the excessive nature of development cycles as neither developers nor lenders had any ability to understand the "big picture." With the emergence of public reporting, the vastly improved flow of information acts swiftly to correct market imbalance, real or perceived, as capital market activities in fall 1998 vividly demonstrated.

This long overdue consolidation of the commercial real estate industry represents a recognition that it - just as other capital intensive industries - is oligopolistic in nature. …

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