My trip to Israel this week (for a speech to Israeli investors in U.S. real estate) reinforced the view that offshore investors see the U.S. as their only sure shot safe haven. Israelis generally have proved extremely savvy investors and the group of over 120 I met with had little interest in Europe—still viewed as a basket case economy—and apparently even less in China and other parts of Asia—not transparent enough.
Obviously strong national ties—the large U.S. Jewish population and U.S. military support—create a natural comfort level for Israelis, but other foreign investors led by Asian sovereign wealth funds and Eurozone players are lining up to make investments here as well, swelling the availability of equity capital looking for opportunities.
Of course, the pickings have become slim in the high-priced 24-hour gateways given slackened tenant demand which does not appear to have enough steam to advance property income streams dramatically—Washington DC has already topped out, New York appears to have crested too (office rents are sideways to down and apartment rents have leveled off), and expect San Francisco to be next.
The Israelis, like many U.S. pension funds and other institutional investors, have begun to chase yield in secondary and tertiary markets—they are looking big time in Texas and are interested in apartments and Sunbelt single family housing plays—something new and different for them.
Other foreign investors may be the most likely in the capital pool to continue paying up for prime properties in the gateways—if only to gain a foothold. They will swallow hard, but figure on holding long term with relatively little downside risk. Investing in midtown Manhattan or along K Street is almost like investing in a T-bill.
I continue to be struck though by how investor expectations continue to be colored by the buy-and-flip syndrome of the recent past—they crave higher returns than the asset class can reliably deliver without gobs of leverage and demand drivers which do not exist.
As Wall Street firms continue to announce layoffs, tax increases begin to kick in, and government spending cuts are a coming attraction little comfort can be taken about the current unemployment rate which hovers close to 8%. At least it isn't anywhere near Europe's doleful 13% average. Can anyone point to any demand trends which will suddenly lift occupancies and rents in office and retail?
The one silver lining out there is fracking, if we are willing to put up with the environmental toll on water pollution and carbon emissions. The U.S. has a real chance to get an economic boost from lower energy costs, which could help support more manufacturing activity here. But any new manufacturing enterprises will be less labor intensive than in the past, and fracking gains will likely reduce jobs in coal country. Texas energy markets will benefit and certain rural areas will too—North Dakota booms for now. But we still need more and new industries which will create many new good paying jobs which will stay in the U.S.
If we don't, all that offshore money may start to look elsewhere.
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
