For so long, so many in the real estate industry could make a killing as an industrious middleman. These middlemen aren’t developers, owners, bankers or property managers—the folks that actually conceive, invest their own money in, and take care of properties. No, I’m talking about the investment advisors, investment bankers, consultants, deal brokers, mortgage bankers, lawyers, appraisers, et al, who made big bucks in the trading arcade. The advisors and investment bankers would cook up plenty of deals with brokers, mostly trade between themselves using client money blessed by the client consultants, finance transactions through mortgage brokers, and hire on lawyers, appraisers, and various others to help consummate the transfers. Ka-ching, ka-ching, ka-ching!
These middle men hordes essentially took big fees out each transaction without adding any economic value. Buildings would trade hands multiple times without significant improvements. Ownership would change, leverage would change, and the middlemen took their cuts every step of the way. If ever there were an unsustainable business model this was it—as soon as investors and lenders figured out that they couldn’t make money if rents didn’t increase and occupancies didn’t stay high, they stopped buying and financing. And without deals, the middlemen couldn’t leech out their lucrative takes.
In our chronic recession where rents don’t increase much and vacancies hardly decline, the motivation withers to do deals. It’s hard to gin up the trading game without a remotely credible story for potential upside. So who needs these middlemen?
But the middleman game has not been confined just to real estate—the Wall Street investment houses expanded their operations and escalated profits off of stock and bond transaction machines. The more trading, the more they make regardless of whether transactions improve companies, enable hiring more workers, or create something new and beneficial. You buy long or sell short, create some sort of derivative, hedge your bets, keep money turning over what ever you do, because each transaction generates some fee. This transaction-for-the sake of transaction model seems to running out of gas in the big financial houses too, and these firms undertake another round of layoffs, which may soften up some of the best real estate markets like New York, home of many wealthy transaction middlemen.
The fall of the middleman unfortunately debilitates the economy and could help keep the U.S. in chronic recession. In its heyday five years ago, the financial industry captured nearly 30% of economic activity and was a major jobs generator. Of course, the banks and investment banks were making all this money off their untenable middleman transaction arcade. All these middlemen who made all this money are either making a lot less or not making any, and young people who went to business school to get in on the action are coming up empty. And let’s not forget all the housing sector middlemen—real estate agents, residential mortgage brokers, house appraisers, and various others, who are sucking wind too. All combined, it’s a huge bite taken out of consumer purchasing power.
The plight of the middleman haunts recovery—trading on paper gains is no substitute for creating products that people actually need and want.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
