Institutional Real Estate Analysis
Grissom, Terry V., DeLisle, James R., Real Estate Issues
The increase of institutional involvement in commercial real estate has heightened the interest of many Counselors of Real Estate (CRE) and other professional service providers in this segment of the real estate market. The equity interest held by six key institutional types as of mid-1995, is approximately $232 billion, the debt funds are approximately $982 billion. Pension funds are the leading holders of equity real estate, followed by life insurance companies and REITs. On the debt side, the key players are the traditional real estate institutions of commercial banks, life insurance companies and thrifts. Pension funds and REITs are only minor debt holders. Foreign investors and foreign banks also are relatively active in both capital sectors (12.3 and 10.5 percent respectively).
Figures 1 and 2 address the relative positions of equity and debt institutions over time. Changing levels of participation are presented in these dynamic illustrations. In general, the more traditional institutions are declining or stabilizing, while the previously designated alternative capital sources of REITs, foreign investors and pension funds are increasing. The magnitude of the institutional market and the changing structure of participants can impact the decision process and approaches to real estate problem solving which, in turn, affects real estate clients and the professional services they require.
An Institutional Framework
This brief overview of the institutional market reflects the thought process, concerns and perspective of many institutional decision makers. They want to position themselves relative to the capital markets and so frame their analysis on the deductive reasoning and techniques taught and used in finance and economics. Practiced, influenced and educated in these areas, influential institutional managers have extended these tools to real estate. Institutional clients, by the nature of their concerns and responsibilities, must compare their real estate interest to capital markets and investment alternatives. Their overview is from investment alternatives and decision criteria, to appropriate investment markets, to possible property types and then specific properties.l However, responsibilities and many concerns require a broader perspective than a parcel-by-parcel view of real estate.2
Also, because institutional ownership is relatively long-term (liquidity is not a key concern given other investments and ongoing capital sources), trends and cycles are as important as current market performance (the traditional emphasis of real estate analysis). This often requires institutional work to link with prior research or to recognize the changes that have occurred over time.
An institutional group must be concerned with problems that often require an analysis of more than an individual property. The analytical unit may be a portfolio of properties, an urban market or comparative markets, a mixed asset portfolio or real estate related assets which vary in terms of private or public interests and debt or equity markets. The latter unit of mixed public/private, debt/ equity real estate related assets, often is referred to as the Four Quadrant Model or Paradigm and further promulgates the deductive approach used or required by institutions. It is a framework of analysis based on a collective asset format which mixes and groups by sources of capital and types of ownership.
Although individual parcel analysis will not become extinct and is necessary to achieve the deductive perspective, it often is used for institutional analysis in the form of secondary real estate databases and indices, rather than real estate's traditional singular transaction orientation. This runs counter to the traditional real estate scenario of inductive logic, beginning with a specific property and its specific market and expanding to more aggregated market and investment concerns. In traditional real estate analysis, information on the real estate is the primary data with the economic, financial and other aggregated data employed from secondary sources. …