To say U.S. real estate markets have changed dramatically over the past 75 years is an understatement. Not only have American real estate markets grown dramatically, but also they have become far more complex and, fortunately, more transparent, which, in turn, has led to further growth of the market. One major transformation began in the 1960s with the formation of the first real estate investment trusts (REITs).
“Prior to that, only wealthy individuals and corporations could realistically invest in commercial real estate,” says Howard Roth, leader of Ernst & Young’s global real estate practice. “While growth of the REIT market was slow initially because of restrictions that were placed on the investment trusts, future legislation led to dramatic growth in REIT formation in the United States. In 1972, the total capitalization of U.S. REITs was less than $1.5 billion; today, it is almost $400 billion.”
In addition, a number of other game-changing developments for commercial real estate markets have occurred since ULI was founded, including two that created conditions for the market’s rapid expansion—securitization of debt in the form of commercial mortgage–backed securities (CMBS), and the rise of the private equity investor. The introduction of the first CMBS issues—securitizing pools of real estate–backed mortgages—delivered greater transparency and liquidity to the global real estate financing markets.
“In 1990, the vast majority of $1.1 trillion in loans on U.S. commercial real estate were held by financial institutions such as banks and life companies,” explains Roth. “But those institutions’ ability to finance real estate ebbed and flowed. By 2007, almost 30 percent of the $3.2 trillion in outstanding real estate debt was held by investors in the form of commercial mortgage-backed securities.”
Real estate private equity is a similar story. “In 1988, there was a single private equity fund dedicated to commercial real estate with a capitalization of just under $1 billion,” says Roth. “By 2004, real estate private equity had become a definable market sector populated by 30 funds and capitalized at almost $20 billion. It’s even bigger today, and real estate private equity funds are among the biggest and most active investors in U.S. real estate markets.”
Sustainability and technology are also among the biggest changes in U.S. real estate markets over the past 75 years. Sustainability was not part of the real estate lexicon until the late 1990s, and then was simply called “green.” Today—and for some considerable time to come—few new office buildings, hotels, or even government buildings will be constructed without sustainability in mind. “Sustainability has brought more than a feel-good process to real estate in the form of lower carbon footprints,” says Roth. “It has offered property owners avenues of opportunity to increase the energy efficiency of their buildings and lower overhead costs. Thus, sustainability is being demanded not only by tenants, but by investors.”