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Welcome to Commercial Real Estate-101

An graphic novella on U.S. commercial real estate history, growth, and modern complexities (with a dash of humor)

Thousands of years ago, in lands not too far away, hunter-gatherers had an epiphany. [Commercial real estate history comic 1]
Once our ancestors staked a claim to land, they began to improve it. These improvements included farming and fortifications. Safety and ample food enabled fecundity and a population explosion. [Commercial real estate history comic 2]
Yet, societies were limited to smaller groups. While fortifications helped, they were no match for large groups of raiders... [[Commercial real estate history comic 3]
...until certain leaders began laying claim to more land in exchange for protection with their armies. In a way, this labor-for-protection system was the first form of rent. Families passed down land ownership and leadership responsibilities from generation to generation, creating dynasties.
Then, rulers began charging taxes in exchange for their militia. Many also bequeathed land rights to friends who were charged with collecting taxes from tenants. The ARISTOCRATS were born.
By segregating duties, a complex ecosystem of labor emerged. Farmers became tradesmen and then merchants. Merchants gained enough wealth to purchase buildings, becoming the first landlords and paving the way for future landlords. [Commercial real estate history comic 6]
The 1732 British Debt Recovery Act treated American real estate as currency for the first time in the soon-to-be-nation’s colonial history.
The Industrial Revolution accelerated the transition from farming to other occupations. With the ability to move up the social ladder via education, once-poor yet-smart people accumulated wealth.
Major property types included office, retail, and residential. Apartments were limited to major urban areas and only started becoming more common in the mid 19th century.
The U.S. achieved independence from Britain, and the first commercial bank in the U.S. opened in 1782. This opened the door for the new class of wealthy individuals to begin buying property.
Wealth continued to spread across classes. Banks proliferated to serve them. Fast forward to the 1930s, and the U.S. experienced its first meltdown of our bourgeoning financial system. [CRE-101 comic 9]
The Great Depression was not kind to the commercial real estate industry. According to HBS, real estate purchased in 1920 only retained 56% of its value in 1940. No bueno. [Commercial real estate history comic -10]
President Roosevelt embarked the country on his New Deal to revive our economy. As part of the New Deal, Congress passed the Glass-Steagall Act. This legislation effectively prevented banks from dealing in securities, including mortgages and related instruments.
Then, in 1938, Congress created the Federal National Mortgage Association (aka “Fannie Mae”) to purchase long-term, fixed-rate mortgages.
For several decades, commercial real estate was mostly at ease in the U.S. With increased urbanization, apartments grew as a popular property type. The first real estate operating company, Hilton Hotels, formed in 1947.
Banks began pressuring Congress to ease restrictions in the 1960s. To quote Booms and Busts in Real Estate, “So short are our memories that we often repeal the very laws that our ancestors passed to protect us, as we have either forgotten their intent or deemed them unnecessary.”
Property management as we know it today also emerged during the 1960s. While caretaker managers existed since the early 20th century, now property managers also managed leasing and marketing.
In the early 1980’s, inflation began to rise, and interest rates peaked. The Federal Reserve caved and reinterpreted Glass-Steagall, allowing banks to invest in mortgage-backed securities.
Congress also empowered U.S. banks to take foreign investment. The combination of increased liquidity and deregulation created a glut of real estate development. Until a decade ago, over half of all commercial real estate built in the U.S. was built in the 1980s.
On the property type front, hospitality grew significantly in the mid-20th century. Also, the first modern assisted living complex opened in 1981.
Deregulation eventually led to the economic downturn from 1986-1995, where over 1,000 thrifts (a type of commercial bank) went bankrupt.
Many believed that the bust was caused by lack of timely construction data. In theory, short-selling would enable commercial real estate to be more accurately priced. Thinking ourselves as all-knowing gods who could solve all problems, we created REITs.
A close relative to REITs were private equity real estate funds. Real estate firms began to copy other corporate investment bankers with the limited partnership structure in the late 1980’s and early 1990’s.
But these vehicles weren’t enough. Certainly not. Once someone creates an interesting financial structure, then everyone and their mom wants to make one on top of it. Enter credit default swaps (CDSs), REITs and PE firm’s little sibling set on proving themself.
Then commercial mortgage-backed securities (CMBS) came along, and boy was that third child popular.
In the property type arena, lifestyle retail centers became popular. So did student housing, with enrollment significantly outpacing the supply of on-campus housing.
To continue growing and making more money, banks took on more risk. Commercial and residential real estate skyrocketed. That is, until 2007.
The 2007-08 Global Financial Crisis (GFC) rocked the world. Between subprime mortgages with subpar assets and excessive risk-taking, American banks were doomed to fail. After Lehman Brothers went bankrupt, the U.S. government bailed out financial firms to avoid additional bankruptcies.
Once again, our government enacted legislation aimed to prevent another catastrophic financial collapse. This time, Congress named it the Dodd–Frank Wall Street Reform and Consumer Protection Act.
The U.S. commercial real estate market steadily recovered over the next decade. Industrial grew as a property type, as at-home deliveries became common. Data centers grew, as big data became many corporations’ strategic advantage. Life sciences and self-storage also became popular asset classes.
The secondary market for real estate also grew significantly during this period. The secondary market allows investors to trade normally illiquid investments in real estate.
Then, in February 2020, a global pandemic struck. The world as we know it shut down overnight. Real estate deals came to a screeching halt. Work-from-home became the expectation rather than the exception. The hospitality industry tanked overnight. Retail businesses relying on foot-traffic did too.
Commodities and supply chain costs surged, as getting goods in and out of countries became increasingly regulated. Employers couldn’t hire fast enough. This led to a surge in inflation from 2021-2022.
As the economy reopened in 2021, U.S. real estate experienced a surge of transactions from pent-up demand. Life seemed really good… almost, too good.
Over the last decade, many commercial banks assumed that all would continue to be rosy and underwrote 5% or more increases in properties’ NOI annually. They didn’t anticipate office tenants realizing that they would save money if their staff worked from home. Or hotels taking longer to fill back up. Or the continued preference towards online shopping instead of in-person.
The Fed increased interest rates to curb inflation from 2022-2023. Higher interest rates significantly increased the cost of capital (i.e. lending) for real estate firms, in addition to other pressures such as insurance.
Layoffs increased in the real estate industry in late 2023-2024. While many economists believe that markets will recover in the next couple of years, I’m not so certain. If history repeats itself, as it often does, then we’re due for a much larger bust before another boom cycle. Let's hope that I’m wrong.

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