The Role of Capital Markets in Real Estate

 The Role of Capital Markets in Real Estate

            The Presentation by Jesse Holshouser, focused on the role of capital markets in real estate investing. Starting with the history of traditional lending by Saving & Loans (S&L) establishments to the very complex world of CMBS loans, Jesse gave a unique perspective as someone who had exposure to the different phases of real estate lending.  

            Working with a local S&L as a young college graduate, Jesse had a hand’s on learning experience that gave him a strong understanding and appreciation for traditional lending and development. During this era, S&L’s were the source of funding for most residential borrowing, while insurance companies provided debt capital on the commercial side. With the introduction of Reg. Q, S&Ls were forced to offer the same rates, which removed the ability for these companies to be competitive. This along with the economic challenges of the 70’s, like spiked inflation, deficit spending and a global energy crisis, led to the S&L crisis from 1976 to 1978.   Even after the government attempted to reverse the effects of Reg. Q, with deregulation, the damage was already done which ended the era of S&Ls.

            As the government pursued more intervention from 1986 to 1995 agencies like the FDIC was introduced to manage regulation. As regulation grew from that time, so did the introduction of financial innovation and what would become a mortgage revolution. Eventually with the introduction of Fannie and Freddie providing insurance to third part investors, came the emergence of mortgage-backed securities. With an abundance of available capital in the mortgage market and Fannie and Freddie backing loans, subprime loans began to become common. These subprime loans would create a doomed bubble that lead to the mortgage crisis and eventually the Great Recession of 2007 & 2008.

            Jesse’s history lesson on the mortgage markets offers an important perspective on where we are today and may shed light on the role of capital markets in real estate in the future. As George Santayana said, “Those that don’t know history are doomed to repeat it.”  Since the great recession, the economy has rebounded, and there has been an abundance of cheap capital available for real estate investments. The demand for these types of investments has caused commercial real estate prices to rise almost artificially, as investors lower their return expectations. Even with more regulation, financial innovation continues to evolve to answer investment demands, and as a result continues to be even more complex. As today’s real estate investors pursue local deals, they must have a handle on the complexity of capital markets to benefit from the availability of affordable capital and avoid future bubbles.  However, local developers and investors with this knowledge and reach will have an advantage in today’s real estate investment climate.