Many investors have reached the conclusion that cap rates and prices in the typical gateway cities have reached a point that it no longer makes sense to invest in these locations. The coming increase in interest rates, whether later this year or surely during 2016, will likely make these values less sustainable. I have been working with a group of Japanese and Chinese investors who have a strong desire to move large sums of capital to the US. In the case of the Japanese it is a combination of the estate tax of 65% and the struggling economy. In the case of the Chinese it is a combination of the anti corruption crack down, which is very real, and the struggling economy. Whatever the reasons, they are anxious to move the capital to what they view as a safer haven.

They began the conversations as most all of these Asians so, which is they want to buy a building in New York, San Francisco or Los Angeles. That is all they know. Many people say the Japanese will invest on a generational basis and so can wait for the long term to make their investment pay off. The reality is while some of that is true, the younger generation of Japanese, many of whom have been educated here, are not the same generational investors. They are much more interested in American style investing and 5 to 7 year horizons, spreadsheet analysis and higher returns in the shorter run. The Chinese need to move their capital to a safe haven but they are much more traders and short term investors, with a higher risk tolerance.

I was able to convince a group of these people to bypass New York and to go to look at Denver and other secondary cities on the basis that the internet has dramatically changed where young people are moving to live and work. These cities are now experiencing a surge of growth and night life, are far less expensive places to live and offer a young and vibrant lifestyle. Places like Denver, Raleigh, Austin and others, have high tech hubs growing into job generators and bringing in young, well educated and affluent people, who are seeking a better living situation than ultra high priced cites like New York and San Francisco can offer to those earning less than top incomes. These cities have a real future for real estate and long term growth and value enhancement as the necessary mass grows in these areas to become a permanent population of vibrant people who then stay to raise families.