The Future Role of REITs in Real Estate Finance

Introduction
Major and somewhat conflicting changes in the roles of real estate investment trusts (REITs) in commercial real estate finance have occurred in the past few years. Before 1990, REITs played a relatively insignificant role in financing commercial real estate. But in the early and mid-1990s, REITs rose dramatically in prominence. By 1997, although REITs still owned only a small percentage of all existing commercial properties, they actually dominated current transactions in many commercial property markets. Yet REIT share prices began lagging the still-rising general stock market early in 1998. Then, in the fall of 1998, when the overall stock market dropped sharply, REIT shares also plunged. However, they have not recovered along with most of the rest of the market, even though most real estate properties themselves are still doing well.

These changes raise questions about the future roles of REITs in financing and operating commercial properties in the U.S. This article contends that the recent shift of much of on-going real estate equity and debt financing from traditional, purely private markets to securitized, public markets has changed the attitudes of investors towards commercial real estate in general. Their change in attitudes is unfavorable to the real estate industry under many economic conditions, including those prevailing in early 1999. This article explores these changes and discusses their implications for the future of commercial real estate in general and REITs in particular.