Over the last 20 years investment companies have come to dominate the real estate investment and development landscape. But this was not always the case. Prior to the mid-1980s, most funding for real estate came from local people — usually through syndication networks and major real estate families. Insurance companies and side-arms of local banks also invested but almost always directly into the specific property.
Beginning in the early 1990s things changed as the financial industry created and popularized an array of new products designed to increase diversification, specialization, and financial engineering. Products such as publicly-traded real estate investment trusts (REITs), private equity, open-ended investment funds, and various asset-backed securities divorced investors from direct ownership in local real estate. While this institutionalization of real estate investment had many benefits, there have also been some unintended consequences that are just now becoming apparent.
Whenever you see a new project being built in your neighborhood, there is typically a single real estate entrepreneur (usually known as a developer) that is credited as the owner. This developer garners the majority of the public attention, and receives both the accolades and criticism that come with the project. What most people don’t know is that this developer has, in fact, only invested a fraction of the total money needed for the project.
Recently, rumors surfaced from a local blog that Whole Foods is considering opening a store on the 600 block of H Street NE, Washington DC. If true, it would mark another major milestone in the ongoing redevelopment of the H Street corridor. It also spurred me to think about what many now call the “Whole Foods Effect” on real estate and neighborhood development.
There is a debate amongst many in the industry as to whether Whole Foods is a driver of neighborhood growth or simply follows it. There’s limited research on this, but it’s useful to think about how a store like Whole Foods drives growth by looking at industry norms.
This article originally appeared appeared February 5, 2013, on page A15 in the U.S. edition of The Wall Street Journal, with the headline: Who Needs Wall Street? as well as on wsj.com. It has been republished here with permission from The Wall Street Journal.
By Daniel Gorfine and Ben Miller
A tectonic shift is under way in how companies raise money—and it will have a profound impact on U.S. investors and markets. According to the Securities and Exchange Commission’s most recent estimates, businesses have been raising more funds through private transactions than through debt and equity offerings registered under the securities laws and offered to the general public.
Overall public debt and equity issuances fell by 11% between 2009 and 2010, to $1.07 trillion, while private issues rose by 31%, to $1.16 trillion. This shift, which has been driven by the rising costs of public-market participation and regulation, will likely accelerate when the SEC implements reforms in the Jumpstart Our Business Startups Act, which the president signed into law last April.
As we discussed in an earlier post, real estate is a hard asset. What exactly is a hard asset? According to the Wikipedia page on the topic:
“Hard assets are investments with intrinsic value such as oil, natural gas, gold, silver, farmland, natural colored diamonds and commercial real estate.”
Like oil or gold, real estate is a commodity, meaning there is a limited supply and therefore it has an inherent value by serving a basic human need. One way to think about a property is in terms of the different commodities of which it is made: 1st) the building (steel, wood, concrete, etc.) and 2nd) the land. Ultimately there is a limited amount of land in the world, although some land (New York City) is more scarce than others (Montana). The building itself is a combination of different raw materials. If the price of those materials goes up, the cost to build a similar building increases, in turn making the existing property more valuable.
Last week, the General Services Administration (GSA) put a 2 acre property up for auction on the Georgetown waterfront in Washington, D.C with a starting-bid of $500,000. The property is commonly known as the Georgetown Heating Plant and includes an 8-story Art Deco building on more than 90,000 square feet of land. The property is one of a kind, and potentially the only site left with an opportunity to build a hotel, office, or condos with views of the Potomac. The GSA itself refers to the property as a “landmark with monumental potential.”
In all likelihood, the purchaser will be some large institutional developer from another city (or country) backed by a big investment fund run out of NYC. The rest of the story is also fairly easy to predict, the winning bidder will spend the next few years or more entangled by a handful of local residents in an us-vs-them battle where community benefits and profit go head-to-head.
But that doesn’t have to be the case. What if instead, the larger community had the opportunity to buy the property?
As you might imagine, there are many factors involved when analyzing a real estate investment. However, when it comes to determining a property’s value (i.e. price) most professionals first use one of two methods: (1) price per unit; and (2) income relative to price.
The first way a real estate professional will underwrite a property is by looking at its price per unit. In other words, how much the seller is asking per unit of building. Each real estate industry sector generally uses a different unit:
The Units of Real Estate
For example, a retail property may be priced at $300 per square foot (PSF), a multifamily residential property may be priced at $250,000 per housing unit, and a luxury hotel could be priced at $500,000 per hotel key.
Real estate investing can be complex. The industry lingo and analysis of most deals often proves intimidating for the average investor with little experience. While no investment is easy, in our experience there are 5 key factors we consider when thinking about making a real estate investment, whether on Fundrise or through other means.
While it may seem obvious, the old saying is true and many people underestimate the power of well-located real estate. During the run-up to the 2008 recession, many financial institutions invested in places where demand didn’t yet exist, like the remote suburbs in Southern California. When the housing boom stopped and the bubble burst, the real estate itself had very little inherent value due to its location. One advantage of investing in local real estate is that you know the property’s location and understand what is going on in the surrounding area. A simple way to think about it is: “Regardless of the condition of the market, is this a location I would want to own 10 years from now?”
