The denominator effect. Just say those words, and people’s heads will knowingly nod in assent. You don’t need to explain. Everyone knows. Those problems in the stock market (and sometimes the bond, or other markets) have spilled over into our real estate world and mucked things up — again.

But how much is the denominator effect truly responsible for the current real estate market capital malaise (to put it mildly)? While the denominator effect certainly was one cause of the current real estate liquidity crunch, its impact was fairly short-lived. Yet, it has served to mask other causes of the investment capital shortage — several of which do not have the superficially satisfying characteristic of originating outside our industry.

Let’s start with a look at the denominator effect itself. In its simplest terms, if real estate values stay flat while other asset values decline, then real estate as a percentage of an institution’s total investment portfolio goes