Amid rising uncertainty in commercial real estate, a marked shift in deal structures is quietly reshaping the way the industry is preparing for its next big test. If the go-go days of the 1980s conjured up deals that stacked on debt and relied on personal guarantees, today’s market is defined by larger equity stakes and a move away from personal recourse. The change, Jody Thornton of JLL explains in an interview on the Intersections podcast, is much more than a technical adjustment—it’s a direct response to the hard lessons learned from past crises and a bet on greater resilience in the face of future volatility.
Thornton recalls entering the industry at a time when “there wasn’t a lot of equity in the business, and developers were borrowing in excess of 100 percent from the bank for their development project and signing personal recourse.” For many, this approach ended badly, exposing both sponsors and lenders to catastrophic losses during downturns. “As tough a time as the 80s were, you learn things you’re not supposed to do, and that was one of the things I learned that you’re not supposed to do,” he reflects.
Instead, equity requirements have steadily climbed: today, “on average, you would see in a commercial real estate deal is 35 to 40 percent equity on a to-be-built deal. And most of our clients don’t—they’ll sign a completion guarantee, but they don’t sign personal recourse.” This new discipline, Thornton argues, acts as a shock absorber for the sector: a protective buffer that softens blows when the unexpected happens.
Yet the new regime is not bulletproof. Thornton is candid that the last major wave of activity—fueled by “free money” and aggressive leverage on multifamily with floating rate debt—still led to some casualties when rates shot up. “Some people out there … were using a little bit higher leverage floating rate debt. And the floating rate debt came due, and that didn’t work out very well for them, and we heard some companies that went under.”
But Thornton stresses the pain was more contained than previous cycles. “It’s not like, you know, the market is foolproof, but I do think the real estate industry is much more prepared to weather a downturn in a storm like that than it was before.”
The tough medicine of higher equity requirements has attracted new and more patient capital, most notably from large institutional investors, pension funds, and family offices, which are comfortable with lower leverage, longer holding periods, and more robust underwriting standards. They partner with seasoned intermediaries to ensure both sponsors and lenders are aligned, and their presence, in Thornton’s view, has “changed the real estate market so we somewhat insulated it from those big swings” seen in prior decades.
The process of financing a deal is no longer just about sourcing debt; it routinely involves “help[ing] find our equity partner also,” a strategic shift that brings more preparation and scrutiny to every transaction.
Still, Thornton offers a note of caution. While many professionals working today have never experienced a real downturn, his firm spends considerable energy on “educating our younger people about what some of that looks like.” There will always be outliers and newer entrants who are tempted by the siren song of leverage, but for the majority, the system is markedly stronger.
Ultimately, Thornton’s perspective is both pragmatic and optimistic. Today’s heightened equity and risk management standards may not shield every investor from loss or every surprise from roiling the market, but they ensure that the bulk of commercial real estate is on safe footing. “If you have the right kind of financing on a piece of real estate, and you have a good chunk of equity in the deal, if we go through a downturn, you’re going to be able to ride through it,” Thornton says. The modern market, with its built-in shock absorbers, is readier than ever for what’s next—but as Thornton’s career makes clear, vigilance and humility remain essential as the cycle turns again.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.