Market Commentary - March 07, 2023

Real Estate Capital Markets: A Comprehensive Guide

March 07, 2023

Soren Godbersen
By Soren Godbersen

Real estate capital markets form the essential framework for valuing, financing, and transacting real estate assets. These markets are vital to the functioning of the real estate industry, enabling developers and investors to access the capital needed for new construction projects and investment ventures.

Real estate capital market asymmetries may create opportunity at different parts of the capital stack, such as in private credit.

More broadly, these markets help to connect supply and demand, allocate investment, and ensure that new building stock is developed where needed. In this article, we will delve into the details of real estate capital markets, what they are, how they work, and their impact on interest rates.

Real Estate Capital Markets Definition

Real estate capital markets are the operating mechanism by which real estate transactions are financed. Real estate capital markets meet the classical definition of a “market” — supply and demand equilibrating to determine the price of capital. Monetary policy (namely the Fed’s benchmark rate) and regulatory factors are also key dynamics in the functioning of real estate capital markets.

What are Capital Markets?

Capital markets are financial markets that facilitate the buying and selling of long-term financial instruments such as stocks, bonds, and other securities. They serve as a channel through which businesses and other entities raise capital by issuing securities to investors. Investors, in turn, purchase these securities in the hope of earning a return on their investment. The real estate industry has its own unique capital markets, which are specifically designed to cater to the needs of property developers and investors.

The Two Real Estate Capital Markets

Essentially, real estate capital markets are financial markets that deal with real estate assets. These markets play a critical role in the real estate industry as they provide developers and investors with access to capital. This capital can be used to fund new construction projects, purchase existing properties, or finance other investment ventures. Real estate capital markets are divided into two main categories: public and private.

Public Capital Markets

Public capital markets refer to the stock exchanges and other financial markets where securities are traded openly to the public. In the real estate industry, these markets are mainly used by real estate investment trusts (REITs) and other real estate companies that have issued stocks to the public. Publicly traded REITs are an excellent way for investors to gain exposure to the real estate industry without having to invest in individual properties directly.

Private Capital Markets

Private capital markets, on the other hand, are not open to the public and are typically used by high-net-worth investors and institutional investors. These markets deal with private equity and private debt securities, which are less broadly available to the general public. Private real estate funds are an excellent example of private capital markets in action. These funds pool together capital from investors and use it to finance real estate investments. Fintech-powered real estate investing platforms, like EquityMultiple, also function as a sort of microcosm of real estate capital markets, matching demand from passive investors to supply from real estate sponsors and developers. 

Private and public real estate markets function very differently from the perspective of investment risk/return profile. Public capital markets are efficient, fast-moving, and highly liquid. These markets are inefficient and, slow-moving, and illiquid. Hence, public-market investments offer higher exposure to “beta,” or returns derived from the dynamics of the entire economy or sectors of the economy. Investments in private capital markets offer higher exposure to “alpha,” or returns derived from skill in management or idiosyncratic factors of the specific asset. 

This key difference is the underpinning of modern portfolio theory: investors may be able to achieve lower cross-asset allocation and lower portfolio volatility by diversifying across public and private markets. The investments on EquityMultiple are an example of “alternative assets” transacted through private capital markets. 

Update — 2024

The Federal Reserve has recently announced that it is not in any rush to cut interest rates, even in the face of higher borrowing costs. Rising interest rates have impacted real estate capital markets profoundly, in a few key ways:

  • With rising cost of capital, real estate values fell precipitously into 2023 and 2024.
  • Consistently rising rates, with no clear end point, have created stasis in CRE transactions; with uncertain capital markets, bid-ask spreads remain high in most areas.
  • Rising rates have created opportunity in private credit and private CRE debt.

With a potential plateauing of rates in the future, industry watchers are optimistic that transaction volume will eventually increase.

Interest Rates in Real Estate Investments 

Interest rates affect the cost of borrowing for developers and investors, which, in turn, impacts the economics of real estate transactions. All else being equal, increases in interest rates drive up the cost of capital, making real estate investments less lucrative and driving down demand for real estate assets. Increases in interest rates therefore lower valuations of real estate assets. This is precisely what we saw in the second half of 2022, when successive interest rate hikes by the Fed contributed to a 17% drop in commercial real estate asset values in aggregate. When interest rates are low, borrowing costs are low, and real estate investments become more attractive to real estate investment firms and developers. On the other hand, when interest rates are high, borrowing costs are high, and real estate investments become less attractive to real estate investment firms and developers.

In summary, real estate capital markets are the lifeblood of the real estate industry. They provide developers and investors with access to capital, which is necessary to fund new construction projects, purchase existing properties, or finance other investment ventures. Public and private are the two main categories of real estate capital markets, each with its own unique features and benefits. Interest rates play a crucial role as well, affecting the cost of borrowing and the supply and demand for real estate assets.

If you are looking to invest in real estate, understanding this topic is crucial. At EquityMultiple, we offer a platform that allows investors to invest in private real estate opportunities through our online marketplace. Sign up for a free account today and start exploring our investment opportunities.


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Soren Godbersen
Soren Godbersen
Soren is Chief Growth Officer at EquityMultiple. Since the launch of the EquityMultiple platform in 2015, he has overseen customer communications and educational content development. Soren is responsible for the ongoing development of the EquityMultiple brand, ensuring a great investor experience, and pursuing sustainable growth for the company. Mr. Godbersen holds a Bachelor's of Arts in Economics from Whitman College, and his writing has appeared in publications such as GlobeSt and the CFA Institute's Enterprising Investor. Prior to EquityMultiple, Mr. Godbersen worked on major product development and marketing initiatives for SaaS companies. He holds a degree in Economics from Whitman College.

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