I recently attended the SIOR conference and visited with some of the most active office and industrial brokers and investors in the country. We mingled and talked about the market and about what’s happening to transaction volume these days.
Overall transaction volume in real estate sales has been extremely high, increasing annually, for about the past decade. But this year, investment sale transaction volume has dropped for the first time in recent memory. A credible source told me that the number of office and industrial buildings being bought and sold is down 10 percent from last year.
What’s interesting to me about this drop, however, is that U.S. investors, primarily large institutions, pension funds and REITs are the cause of the slowing in deal volume. Looking more closely into the numbers, it is apparent that while U.S. investors are cooling and pulling back, the drop would have been much worse had it not been for the growing amount of capital flowing in from overseas, primarily from the Middle East, China and Japan.
This reminds me of how back in the 1980s, Japanese corporations went on a buying spree in the United States. Japanese investors bought lots of real estate, including golf courses and pieces of New York’s Rockefeller Center, causing some people to wonder if the Japanese were mounting a “takeover” of the U.S. economy.
It could be time for round 2 of that scenario, only this time it won’t be Japanese banks doing the buying, rather it will be Japanese pension funds, which happen to be the largest pension funds in the world, or it might be Chinese sovereign funds. A recurring theme of the SIOR conference is that there is a whole lot of capital coming in over the borders into the U.S. And it’s not just coming into the top tier markets, but markets including Charlotte, Charleston, even the “Upstate” of S.C. Last week I met with a large Chinese bank, who was considering a deal we have in Spartanburg. The Chinese bank knew a lot about Spartanburg, and Greenville. The bank’s rep I met with talked about the BMW-inspired boom in manufacturing, and could discuss nuances between North Carolina economic development and South Carolina economic development. He knew inland port activity and detailed market statistics. As we drove the market together, he brought me up to speed on what was happening with the Charlotte Hornets and said that they have invested in nearly every NBA city.
Some of the smartest people at the conference talked about how they expect the amount of money coming in from overseas capital markets to double as investors chase yield. The stock and bond markets aren’t providing that yield, so real estate is looking more and more like an alternative investment where foreign investors can get the returns they need.
You just have to look to Uptown to see the impact of this overseas investment. The SkyHouse Uptown apartment towers were funded in part by a Chinese investor. One thing that bodes well for these foreign investors is they have a different approach than their typical American counterparts. American real estate investors prefer a 12-month horizon for their investments. The Chinese and the sovereign wealth funds are far more patient. They are willing to wait five years for a project to be profitable. Our culture here is to make money a whole lot quicker. But with this more patient and longer-term perspective, overseas investors, I predict, can do very well in Spartanburg.