The Institutionalization of Real Estate

by Greg Barrett

One of the biggest changes to the commercial real estate industry, over the last 15 years, has been the increase in institutionalization within the asset class. Institutionalization is a key driver of many of the trends we see today. The industry is now dominated by corporations that specialize in real estate investing. 20 or so years ago, believe it or not, real estate was not regarded as a solid asset class – like it is today. In the 70’s and 80’s, real estate was perceived as deal driven, over-leveraged, tax oriented, and too entrepreneurial and risky for institutional investors. As the perception changed, institutional investors quickly began pouring money into the commercial real estate sector.

Who are Institutional Investors?

Institutional investors are entities that pool capital for investment. Institutional investors are very different form the individual private investors and companies that owned the lions share of commercial real estate assets preceding the transformation. Institutions don’t make products or services – they invest money in real estate, to make more money. The heavy players in this sector include REITs, private investment funds, and financial intermediaries. Financial intermediaries are banks and credit unions, insurance companies, and thrift institutions.

REITs are one of the primary institutional players. Most REIT’s are publicly traded, although some operate in the private market. The REIT was created by Congress in the 1960’s. It took until the 1990’s, however, for REITs to really take off. Today REITs dominate the investment landscape, from office towers, malls, retail strip centers, data centers, multifamily housing, and self storage etc. There are even a few cannabis REITs. Pension funds are another huge pool of capital. REITs and pension funds now control a large chunk of the commercial real estate in the U.S.

How has the Commercial Real Estate Business Changed?

Commercial real estate is no longer an amateurs game where wealthy individuals can succeed by investing their money part time. Most of the real estate in the US is controlled by big companies that specialize in a particular product type. These firms employ a plethora of attorney’s, leasing specialists, financial analysts, acquisitions specialists, accountants and so forth. They create for themselves economies of scale which provide a competitive advantage over most small investors. As a result, their cost of capital is significantly less that that of small private investors.

The question then becomes, how does one find success in this environment, now and in the future? My blog seeks to be a resource to provide insight into how this can be achieved. I don’t have a crystal ball, nor should you believe anyone who says they do. My advice is to look at trends, gather as much information as possible, and use common sense to make educated decisions. Additionally, to succeed as a small private investor, one can’t try to beat the big guys at their game.  Private investors need to find investment opportunities that only those with local market knowledge are able to exploit.  If you can consistently make informed decisions based on local knowledge and information, and execute effectively, you will over the long run, be successful.

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