Most are aware of the recent housing bubble in the U.S., which caused strife across the nation's economy. However, there may be many in Michigan and other states who do not realize that an entire portion of the real estate sector was able to avoid the negative effects of the real estate boom and bust. Commercial real estate did not experience the same boom and bust effect witnessed in the housing market.
A recent study suggests that Real Estate Investment Trusts (REITs) played a significant role in keeping the commercial real estate market safe from the boom and bust effect. The study, which was published in the Journal of Portfolio Management, was conducted by the head of financial markets and economics of an international bank, a real estate professor and a BIS statistical analyst. However, the study published in the journal has not received significant attention outside of those already involved in REITs.
The article hypothesized that REITs maintained a higher level of transparency, which enabled real estate investors to quickly and easily recognize overvaluation and undervaluation. For example, investors may realize that a particular region is being overbuilt if REIT prices drop after the announcement of a new construction project. This may result from REITs having an interest in being seen as reliable.
With this new study, many in Michigan may start thinking about investing in commercial real estate. However, purchasing or developing a commercial property investment may not be as simple as one thinks. It takes significant legal paperwork to be submitted to the proper regulating agencies in order to make a new commercial real estate project legit. Also, adherence to any relevant rules and regulations is of utmost importance.
Bloomberg Businessweek, "Commercial Real Estate Didn't Boom and Bust. Is This Why?", Peter Coy, June 13, 2014