Originally published in American City Business Journals
By Brian Watson
There are four simple rules about capital investment, especially in commercial real estate: It will flow to where it’s most wanted, where it’s respected, where it’s safe, and where it has the highest probability of market-rate adjusted returns.
And that’s exactly what’s driving international capital into commercial real estate right now in the United States — in ways that will impact everything from rents to the eventual shape of our skylines.
Global investors worried about a cooling Chinese economy and ongoing concerns related to Brexit and the future of the European Union are increasingly turning their attention to the United States for safety, cash-flow, higher returns and stability, bringing much of the investment capital that used to flow into Europe and China with them. Some investment is even coming in from Venezuela, which is mired in strife and turmoil, and many other South American countries.
The result?
The big, gateway-city markets in this country where international investors tend to focus their attention — New York, Los Angeles and Miami, for example — may be overheated. Prices in those cities, particularly in real estate, are reaching all-time highs, reducing the potential upside and pricing out even deep-pocketed investors.
As a result, major metros like New York may be in the 9 th inning for investors; everyone is getting in their last at-bats. All markets eventually cool off or plateau, as what goes up, comes down.
Hot second- and third-tier cities
Yet, there is another side to this trend that’s worth noting.
Given the overheated gateway markets, international capital is now seeking purchase in second- and third-tier American cities — places like Denver, Phoenix and Nashville. In communities like these, the economic impact from energy (think fracking) and manufacturing (think self-driving cars) is likely to mean rising incomes and values.
Some of these cities are just plain hot. The cost of doing business in Nashville, for example, is 20 percent less than the rest of the country. Others are experiencing population and job growth where investors are finding greater value and greater potential returns. Salt Lake City, for instance, posted some of the fastest job growthin the nation last year at 3.4 percent and payrolls were at an all-time high.
Good and bad news
On the one hand, this is great news for the United States, as more capital is infused into local markets, which creates construction jobs, provides new space for companies, and frees up capital for sellers of existing assets to deploy into other investment opportunities.
But the impact on prices in the tertiary markets remains a question. Excess capital has been inflating real estate prices in gateway cities for a variety of reasons, including foreign investors viewing them as more stable when held up against other, riskier overseas markets. This risk can be both economic and political.
Over time, this trend may begin happening in places such as Oakland and Tulsa as overseas investors pile in, creating opportunity for the average American seller and more competition for local buyers seeking to buy property in their own city. The potential is there to begin pricing out domestic buyers in midsized cities, much as they have been priced out of many major markets.
But one thing is clear: International interest in the United States is not going away. In fact, the potential changes that are coming to domestic regulations, infrastructure spending, energy development and more all point to a U.S. market that will continue to be very attractive for overseas capital for the foreseeable future.
Brian Watson is the founder, chairman and CEO of the privately held commercial real estate investment organization Northstar Commercial Partners. In this capacity, he manages the firm’s overall business, investment strategy and new initiatives, as well as sitting on the investment committee of all underlying funds and being involved in all major investment decisions.