Commercial real estate capital markets are where real estate debt and equity tools are both bought and sold. Similarly to capital markets, the variation is in the attachment of these traded instruments to a commercial property. As a major component of the commercial real estate industry and the broader economy, commercial real estate capital markets allow investment both directly and indirectly into real estate through new investments and the resale of existing securities on the secondary market. Since Real Estate investments are secured by property or mortgages, real estate capital markets expose investors to lower levels of risks than unsecured capital markets. In commercial real estate, capital markets normally handle investment sales or debt placement.
Within real estate capital markets, one of the tools being bought and sold is debt. Borrowers utilize debt to increase the amount of capital available for a real estate investment. Governments, investors, businesses, and large institutions oftentimes need to borrow capital to fund a real estate opportunity; real estate debt financing can be seen as a resource to unlock funds that can be used in both the public and private sectors.
In addition to borrowing necessary funds from the real estate capital market, individuals can inject funds into the capital market for investment purposes. Investments in the real estate capital market are considered equities and they can be packaged and sold as securities within the secondary market as well. For an investor, once a property that they invested in begins to cash flow, dividends are paid out.
Capital markets demonstrate the movement and usage of capital between the macro environment and individual sectors of the economy. The amount of funds flowing within the economy influences the pricing of commercial real estate. This affects investor outlooks on the market, which in turn influences the funds that they are willing to invest in the commercial real estate market. The circular loop of supply and demand of capital within the broader economy directly impacts how commercial real estate capital markets are functioning.
Public equity refers to public companies investing in equity securities on the secondary market.
The private equity capital market refers to equity securities being traded from private companies.
Public debt capital markets are the markets where public bonds and notes for borrowed capital are sold. These markets allow investors to collect funding (with interest) for commercial real estate projects. Tools that fall under this category include: CMBS or Commercial Backed Mortgage Securities, as well as Collateralized debt obligations (CDOs).
Private debt operates in a similar manner to public debt capital markets, with the main difference being private origination rather than the debt being bought and sold on the public market.
There are many real estate debt financing options which vary depending on the investment strategy; Long-term agency financing or a mortgage taken out through a traditional bank, tends to favor those experienced in real estate investing, and provides flexibility in prepayment at appealing rates. Another option is hard money; with significantly less documentation and credit approval required, this route is a great option for investors looking to garner debt quickly for a deal.
Yes, purchasing commercial real estate allows the property to appreciate over time, especially if the property is in a growing market and upgrades are done. By purchasing, you are able to receive tax deductions for interest and can manage the operating performance of the property.
Typically, acquiring a commercial property requires significant upfront capital and maintenance costs. Because of its nature of being illiquid, CRE investment doesn’t give you the freedom to pull your money out in a rapid fashion and is rather seen as a longer term investment.
Real estate capital markets are made up of investors and institutional investors involved in the supply of capital for commercial real estate properties (either directly or indirectly).