The State of Real-Estate Investing

Another good example of where Booth helped shape our opinion—and we in turn helped shape industry practices—comes with regard to capital structure. Merton Miller taught us and the world a lot about the appropriate capital structure for corporations. The idea that REITs, which don’t pay taxes at an entity level, should have lower debt than most tax-paying corporations is straight out of the Modigliani-Miller theorem handbook. Yet public REITs are easily the most leveraged sector of the S&P 500. It never made much sense to us that real-estate operators had as much leverage as they did, and I think we’ve helped change some minds on that front—we, along with the global financial crisis, that is.

Pagliari: I would echo that. Green Street was at the forefront of questioning the aggressive leverage ratios of publicly traded REITs—and to your credit, you were on that podium well before the financial crisis.

Kirby: Today’s REITs are a much better breed because of it. To the extent we played a role there, I think we’d have to go back and give credit to Modigliani and Miller for coming up with a theory that caused us to hold the view that we hold.

Pagliari: What other big transformations have you witnessed in the REIT industry over all these years?

Kirby: When I entered the real-estate industry after Booth, you did not find many graduates from top-tier business schools. The quality of the people and the quality of the thinking in the industry today is much, much higher. That has made a big difference. Are there bad actors? Yes. Is corporate governance any good? No. There are still problems. We still have entrenched management teams. There are still REITs out there that shouldn’t exist. But by and large, the idea of best practices has been absorbed by most companies.

Pagliari: What about the whole expansion into non-core property types? I assume back in the mid-1980s, most of the REITs were in the core space—high-quality apartment, industrial, office, and retail properties. But now, more than 60 percent of the Nareit Index is what we would consider non-core properties, things like cell towers, data centers, lab space, and single-family rentals, to mention a few.

Kirby: We’ve been big fans of non-core for years—healthcare REITs, self-storage, manufactured housing, and a lot of other property sectors as well. As long as real-estate investors continue to cling to this concept of core and non-core, you’re going to have pricing inefficiencies. And that’s wonderful—for us, if not for the industry—because it creates opportunities for our clients.

Pagliari: What advice would you like to share with our students and young alums?

Kirby: Fama’s advice is great advice: if you’re in the investing world in any way, shape, or form, be humble. Identify the questions that you can’t answer any better than the market—and at least 95 percent of all questions fall into that camp—and focus on the other 5 percent where you have an informational advantage.

If you’re going into the real-estate world, become familiar with both the public market and the private market. You will have a career advantage over folks who get stuck in one or the other. The percentage of participants in our industry who are good at talking across both markets is still small. Try to check both boxes pretty early in your career. 

Eugene F. Fama, MBA ’64, PhD ’64, is the Robert R. McCormick Distinguished Service Professor of Finance and a Nobel laureate. Merton Miller (1923–2000) joined the Booth faculty in 1961 and retired in 1993. He is also a Nobel laureate.