Most people don’t know how commercial real estate is owned and funded. Who profits from the places that you live and shop?
Who is building New Rochelle?
The short answer is not you and probably not anyone that you know. That’s a strange notion. One hundred years ago, everything that you invested in was local and now nearly nothing is. And local people, local families used to owned the local real estate. People who were invested in the community used to be part of the decision making of what got built.
How did this happen? Interestingly, much of it dates back to the Savings and Loans Crisis in the late 1980’s. The Savings and Loans Crisis was the largest real estate failure in the history of the United States at that time, totaling $4 billion in bad assets. So, the private capital markets had dried up. Financial innovators of that period figured out that if they gathered the real estate into pools then they could access public markets and pension funds. These pools became known as private equity funds and real estate investment trusts (REITs) and the idea really worked.
In the early 1990’s, there were very few private equity funds or any public real estate investment funds. Twenty years later, and they own and control over a trillion dollars in local real estate. A lot more capital came into the real estate industry, but there were a lot of unintended consequences when institutional capital took over this industry. What it did was disconnected the people who live in a place from the people who invest in a place. It created a long supply chain of how money flowed into assets. And it turned real estate into a commodity, like a bond, as opposed to a place that has meaning and a sense of connection to the people that lived there.
What if you just went direct?