Editor's statement

Real Estate Issues, Dec 1997 by Smith, Halbert C

Capital formation in real estate is occurring at a more rapid pace than at any other time in our history. Most of the market mechanisms to enable this cadence of growth have been developed only in the last several years, and the shift in real estate finance can only be described as revolutionary The re-emergence of REITs in a more viable format than existed in the 1970s and the development of commercial mortgage-backed securities (CMBS) in the mid-1990s have, in large measure, converted the "property" market into a segment of the securities markets. What was formerly only a dream of real estate developers and investors of being able to tap into the capital markets has truly been realized.

These financial developments came at a propitious time, following the great real estate depression of the late 1980s and early 1990s. With the oversupply of properties and the dearth of development activity during that period having run its course, the increasing demand of the mid-1990s required enormous sources of capital. This year, for example, the total market capitalization of CMBS may reach $150 billion-triple the $50 billion of just four years earlier. REITs, of course, have had an equally dramatic growth story, and it is now these forms of securitized real estate that dominate the real estate investment activities of institutional investors.

Institutional investors are replacing substantial portions of the equity real estate investments with real estate securities. For example, the percentage of pension fund assets in equity real estate is now between 2 percent and 3 percent, down from almost 4 percent in the early 1990s, with the slack being taken up by both CMBS and REIT shares. Other institutional investors have followed the same trends, with banks and life insurance companies continuing to make the vast majority of direct loans for real estate financing.

In this Special Edition of Real Estate Issues some excellent articles address these changes and their effects on the market. A case study of a REIT roll-up by John McMahan highlights the important issues facing an adviser and clients in determining whether to combine real estate assets in the REIT form. Buzz McCoy presents the "big picture" of market shifts and terms it "a new paradigm." Ken Riggs takes a capital flows approach to measuring and explaining the market revolution, while Scott Muldavin links information needs to specific applications for various user groups.

An article by Hardin and Fay discusses some of the most important changes in the 1997 Taxpayer Relief Act affecting real estate investors, while Sivitanides and Sivitanidou document differentials in capitalization rates across property types. Finally, John Rutledge presents a viewpoint that is somewhat different from the traditional viewpoint about how real estate debt affects asset allocation.

Enjoy and profit!