You Say You Want a (REIT) Revolution

Bernard Winograd

Zell/Lurie Center Working Papers from Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania

Abstract: The U.S. real estate capital markets and the industry itself have been profoundly affected by the proliferation of public companies. But, by the end of 1999, Real Estate Investment Trust (REIT) FFO multiples had been shrinking for more than two years in a row, and the REIT revolution had stalled. Before 1992, the real estate industry was entrepreneurial and financed predominantly by non-recourse debt, the major result of which has been the focus on cash flow rather than on income. The most significant consequence of the real estate industry’s dependence on debt has been a boom-and-bust pattern. The industry has also been more dependent on project financing as opposed to corporate financing. The debate over the right financing strategy for REITS remains unsettled, as corporate finance ideas that are commonplace in other industries collide with traditional thinking among real estate practitioners. Getting the right number for depreciation has been an issue and the real estate industry, unlike any other, continues to use a measure of earnings not easily subject to audit. Two alternative scenarios for the future are suggested, representing the extremes of what might happen if public capital continues to increase in importance, or if its importance diminishes.

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