Wednesday, April 13, 2011
International Investors Invade U.S.
They're coming! They're coming! Okay, let me back up for a minute. I receive emails every now and then, or even phone calls from CoC readers who will say, "Hey Brent, you're out there saying things are rosy, jump in. Of course you would say that, you're an agent." First, yes indeed I am a licensed real estate agent in the State of Ohio, USA. Now, with that said, I haven't said things are rosy. I have said that things appear to be improving. And if you look back at a lot of my earlier posts, I said I was not nearly as optimistic as many of my colleagues in the industry. In fact I was downright pessimistic. Then I became (gasp) cautiously optimistic. I am still in that category but continue to see improvements not just in fundamental indicators, but real life activity in my market here in Central Ohio, and in some other markets I follow closely. But then remember, the health of all real estate -- whether commercial/investment or residential -- is driven, in part, by location, location LOCATION. Central Ohio fared better than many markets because it is more diversified economically, and is not a resort area that saw a steep run-up of unsustainable increases in prices over a decade or less. So with that said, WHO is coming? International investors, that's who. So don't take my word for it that things are improving. Take a look at new stats from various organizations that track that sort of thing. Here are just a few nuggets: 1) Foreign investors purchased approximately $41 billion worth of residential property in 2010, according to the National Association of Realtors. That represents about 4 percent of the market. The NAR also reports that sales to international investors were reported in 39 states. And about 28 percent of Realtors told the NAR that they have at least one international client (for disclosure purposes, I several myself). 2) Investors from China, the United Kingdom and France are taking an increased interest in U.S real estate. Canadians continue to be active. 3) And the one I love is this: European pension funds are expected to double their investment in American real estate this year to $1 billion. Why? Because the U.S. is still viewed as a safe place to park your money. Here are few other reasons why our shores are being invaded by foreign capital: -- The continued weakening of the U.S. dollar -- Residential real estate continues to be flat, and commercial/investment is only barely starting to improve. -- Unrest in the Middle East and Northern Africa. -- The European debt crisis. -- Even nuclear concerns in Japan ... And here are some reasons why U.S. investors are finally waking up. There has been a dearth of decent properties on the market for some time. And those few out there were (and in some cases still are) way overpriced. And as it is only a matter of time before higher inflation makes its way into official U.S. figures, commercial/investment real estate -- as always -- will once again provide a decent hedge against inflation. Plus, those "decent" properties are either properly priced (finally) or are in distress and can be picked up at a significant discount, creating strong upside opportunities once they are stabilized and the economy gets back on track. According to National Real Estate Investor magazine, contributing columnist Victor Calanog writes that (as I have written on this blog in months past) food prices are spiking and the price of oil was inching upward even before the latest unrest in the Middle East sparked shortage fears. Even Wal-Mart CEO Bill Simon is warning that "inflation is going to be serious." But market watchers, which include myself, are thinking that 2011 will be a robust year. I am in that cautiously optimistic category, but then keep in mind that CRE volume was off some 90 percent in 2010 when compared to 2009. A 90 percent drop in volume! Assets returning 10 or 11 percent clearly represent a good hedge against inflation. The trick to all of this will be to find quality assets -- the kind that offer significant income and solid rates of return. All things that your handy real estate investment counselor can help with. If you need help finding one, please drop me a line and I would be happy to introduce you to reputable commercial/investment specialists in most parts of the U.S. Your next logical question SHOULD be, "But Brent, could there be trouble ahead?" Sure there could. Clearly another hiccup in the economy could stall what appears to be movement toward a commercial/investment real estate recovery. If there is a double-dip problem with housing, CRE may be affected. But right now they are going in two different directions, as housing prices and sales totals still are falling while CRE values and volume is ticking upward. The real problem will be if banks sit on housing inventory, it may take years to clear -- just as it did following the Great Depression of the early-mid 20th century. There are some estimates that approximately two million more homes are slated for default in the next two years. So prices, or better said, "values," will most likely continue to fall. Thankfully, there are differences that have allowed the fates of residential and commercial real estate to diverge, causing them to travel in different paths. Specifically households suffer psychological scars from the residential bust, and there is limited access to capital. Commercial, on the other hand, has suffered from lack of access to capital and some increases in vacancies as the economy tanked. But capital is roaring back now, at least via private investors, REITs, and pension funds -- even as traditional lenders such as banks have not yet woken up. The CRE correction, according to Kevin White, a real estate strategist with CoStar Group has largely run its course because it was less inhibited. Translation from your author tonight: Government intruded less harshly on the commercial/investment real estate market than it did on the housing market. What's more, in many parts of the U.S. commercial real estate did not suffer the amount of "overbuilding" that took place in the residential sector. Therefore, while there are vacancies and things have been slow, there is less product available to fill when compared with housing that never got filled, that which has been foreclosed on and is sitting vacant, and those homeowners in serious financial straits who are watching the clock and their mailboxes, waiting for the other shoe to drop. All of which creates incredible buying opportunities. So again as I stated at the top of this post -- don't take my word for it that real estate, whether commercial or residential, is a value right now. Overseas buyers are flooding our shores with cash, looking for bargains because this is probably the safest place on the planet to park their money. American investors are waking up to this slowly but surely. Clearly, most Americans invested in 401(k)s, pensions and and other institutional investment vehicles probably don't even realize that part of the portfolio they may well be in is in real estate. And the percentage of those portfolios in such investment vehicles is growing. But Europeans, Chinese and others don't need to see what U.S. pension funds are doing to help them make up their minds. They are looking strictly at investment opportunities and are not jaded by gloom and doom news reports each night on American newscasts. My two cents .... (long-winded though it was).
Posted by Brent Greer at 8:31 PM