Commercial real estate (inclusive of agricultural land) is the oldest asset class, but not the most transparent or the best understood. Once dominated by wealthy individuals, this asset class is now aggressively sought by diverse investors as a primary asset. Straight forward financing has been augmented by complex financial instruments. Assets and portfolios are constantly being restructured. Real estate has shifted from a local to a global asset and when commercial real estate assets are misaligned with market fundamentals, markets can overheat and bubbles form. When the “bubble” bursts, individuals, institutions, markets and economies suffer the consequences.
To better understand and manage asset bubbles and market downturns, one must understand the underlying ecosystem. This ecosystem is comprised of market Players and Influencers. Think of the ecosystem as a building where Tenant rent payments are at the base. The more the building is occupied by tenants, the more robust the income stream and the more valuable the property.
The ecosystem is fueled by a variety of debt and equity investors, each with their own risk profile as represented by the Debt and Equity Tower. As one goes higher up in the tower, both the risk appetite and the expected return increases. Although there are many debt and equity investors, they often act independently of one another.
These debt and equity investors all have direct access to Investment Managers as illustrated by the elevator on the right hand side of the facade; the Investment Manager places the capital on behalf of the investors. Once the capital is placed, the Real Estate Manager is responsible for managing the property asset consistent with the goals of the investors as stated by the Investment Manager.
The market Players are supported by a cadre of market Influencers; these Influencers are represented by the Property Services Tower. In addition to the many regulatory and legislative Policy Makers that influence commercial real estate, market Influencers include Appraisers, Central Banks, Economists, the Media and more.
Throughout the life of the investment, the climate is constantly changing and each of the Players monitor their interest and investment in the building. Each Player has a different focus/perspective (income, fees, capital appreciation, use), as illustrated from their differing views from their windows and Players use different metrics to measure success and monitor operations.
Actions taken by the Players and the Influencers ripple across the entire ecosystem and the effects of many small changes are often compounded and amplified throughout the system.