Seeing the matrix


Do you remember The Matrix, the amazing 1990s sci-fi flick with Keanu Reeves? In it, Keanu’s character learns to see the numbers behind the invented reality he inhabits.

Why am I talking about this on a real estate blog? Because it occurred to me this morning as I was taking out the trash from our office that I see the matrix, too (or, at least, a part of it). Stop laughing.

Take a look around you. Do you see buildings? If you do, what you’re really seeing are the physical manifestations of capital and the cashflows that capital commands.

What’s capital? Capital is stored, excess value. You work, generate income, and consume less than you generate. The remainder, which you save, is capital, which can be put to work productively, either by you or by others to whom you give it (via equity investment or loans) in exchange for a cashflow of some kind.

And capital and its attendant cashflows are physically manifested all around us, all the time.

Do you see a house? That’s capital provided by a bank which commands a cashflow from the borrower who “owns” the house (I put “owns” in quotes because, of course, the bank has first call on the value of the house until the lien is satisfied). There’s also an implicit stream of cash flowing to the owner in exchange for his equity which he enjoys in the form of the right to use the house and benefit from the appreciation.

Do you see an apartment or office building? That’s a stream of rent, less expenses, flowing to the owners and to whichever bank financed them.

Do you see an owner-user commercial building (like a factor owned by the company that produces things there)? The company doesn’t pay rent to itself. However, the company’s profits are higher because it’s not paying rent and the difference between what the company’s profits are and what they would be if the company had to pay rent for the space represents an implicit cashflow owing to the company because it owns the asset.

Depending on, inter alia, interest rates, the rate of decay or improvement of the physical structures themselves, and long-term changes in the desirability of different neighborhoods, the values placed by the market on the cashflows constantly change. Understanding those values and being able to anticipate how they can and will change is at the heart of what we do.

Remember this as you walk around looking at buildings.