This event caused a disruption in the real estate markets quite unrelated to real estate fundamentals or to bank health. The advent of REITs represents an increase in the integration between real estate markets and capital markets. Liquidity has improved, and recent events suggest that if capital market participants view the real estate industry unfavorably, then they will enforce discipline through market prices. This is surely a positive development and will force greater scrutiny on real estate deals. Of course, it is premature to proclaim an end to the real estate cycle, or even an end to a real estate cycle driven by funding considerations.
Capital markets are vulnerable to shocks in the same way that banks are.
John Krainer Economist Reference Nelling, et al. Real Estate Investment Trusts, Small Stocks, and Bid-Ask Spreads. Real Estate Economics 23, pp. Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System. Editorial comments may be addressed to the editor or to the author.