Real Estate - Asset Class Vs. Industry

The Real Estate Market has many attributes and can only be categorized in a general sense. Attributes such as property type (Apartments, Industrial, Office, General Commercial, Retail, Special Use), must be considered along with the Regional (Macro Economic) and Neighborhood (Micro Economic) factors and the particular lease structure(s) that may be in place. Any one of those issues can make a particular property particularly attractive or undesirable depending upon the issue. In a particular market it is possible for an individual property type, such as an apartment project, to do very well economically, along side another different property type that is failing miserably. The analysis of these factors are in part what differentiate real estate investors from other more conventional equity investors.

Institutional investors normally have to look for investments throughout the country and often invest in a particular asset class such as industrial, retail or multi-family. They become astute at a particular property type and therefore understand the nuances of that particular asset class. For industrial properties this might include rail spurs, cranes, dock high floors, loading elevators and functional issues. Other investors are area specific and invest in particular locals and become very astute at the attributes and dynamics of a given market and usually for a particular type of property.

Other investors are simply buying a cash flow or the lessee's ability to pay rent. In this case the investor is often more interested in the tenants ability to pay the rent than the location or property type. This type of investor will characteristically review and analyze the tenants ability to pay the rent for the term of the lease and assume a provision for lease renewal or rollover at the end of the lease. Obviously, in most situations the risk of rollover or renewal will be lessened significantly if the area is in a stable to growing mode or will be when the lease rolls.

There are some factors that can influence the industry across the spectrum, such as interest rates or the availability of financing. When interest rates are high relative to historical standards, this has a tendency of adversely influencing the entire Industry. Further, when there is a significant amount of funds available in the market for investors at reasonable rates, this tends to have a positive influence on the Industry. However, these factors tend to impact real estate in an indirect manor. In other words, a 1% decrease in mortgage coupon rates does not cause capitalization rates to decrease proportionally.

In conclusion, there are factors such as the availability of funds and interest rates that can influence the Real Estate Industry, both positively and negatively depending upon the trends. On the other hand, property type and location (macro and micro economic) can operate independently of a given markets trends. Therefore, in discussing "The Real Estate Market", it is important to clarify the particular property type, location, and macro economic trends, such as capital availability/pricing.

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