Why the Real Estate Industry Needs More Equity, Less Debt

Real estate development in the U.S. has historically been driven by entrepreneurs with great ambition and visions of grandeur, but thin pocketbooks. Lacking their own controlled or discretionary capital, these developers needed to sell their ideas to banks, pension funds, and other investors. This reality dictated more leverage, as equity was expensive and diluted the entrepreneur’s take-home profit. This was never more evident than in the 1980s-1990s when the S&L industry often provided close to 100 percent loan capitalizations. We all know how that played out, with a crashed real estate industry starved for the equity capital it was missing in the first place. Today’s real estate industry has joined other institutional asset classes with improved discipline, protocol and process as demanded by both investors and regulators.