When Russian tanks rolled into Ukraine earlier this year, commercial real estate buyers beat a swift, and predictable, retreat. Nothing shakes investors’ faith in a market faster than fear of war, sanctions and civil unrest. According to JLL, investment in Ukrainian real estate in 2014 is projected be less than half what it was last year, falling to just $3.4 billion.
But capital that flees a crisis-stricken market doesn’t necessarily leave commercial real estate. Instead, it often simply migrates to more secure markets. That’s why stable governments and strong economies have long been the traits that investors value the most. But these days they’re increasingly attracted to markets that offer something nobody talked about 10 years ago: transparency.
“If I’m a Chinese billionaire, and I’m looking for a safe, stable place to park my money, one that will give me a solid return on my investment, and eventually the ability to get that money back to my family in Beijing again—there’s no better place, in addition to the usual core markets, than a market like Houston or Chicago or Seattle”
Steve Collins, President of JLL’s Capital Markets
Open-data policies, increased clarity, predictability, and reliable measurement all meld together to form what those in the commercial real estate industry call “transparency.” Those collective traits show a correlation that’s helping several second-tier U.S. cities pull down big commercial real-estate investments lately, according to Steve Collins, President of JLL’s Capital Markets.
“If I’m a Chinese billionaire, and I’m looking for a safe, stable place to park my money, one that will give me a solid return on my investment, and eventually the ability to get that money back to my family in Beijing again—there’s no better place, in addition to the usual core markets, than a market like Houston or Chicago or Seattle,” says Collins.
Collins argues that gains in transparency have opened those and a number of other U.S. markets to foreign capital that used to flow almost exclusively to gateway markets like New York and San Francisco.
JLL’s latest Transparency Index ranks the U.S. as the second-most transparent country in the world, behind the United Kingdom. In particular, markets such as Houston and Seattle can now be classified as “emerging gateway” markets, experiencing unprecedented international interest. Foreign investors, increasingly priced out of core gateway markets, are turning to the higher-yielding markets such as Atlanta, Austin, Dallas and Phoenix.
A representative of a High Net Worth (HNW) family in South America who doesn’t want to be named tells JLL that transparency in the U.S. market is one of the key reasons they choose markets like Seattle, Portland and even Pittsburgh for their commercial real estate investments. “We focus on places where we can understand the legislation and the ground rules. Where you really feel like if you have to go to court, you’ll be well protected and corruption levels are at a minimum. That’s a key feature,” he says. In particular, the gentleman says they are looking at Portland with a keen eye as the market offers both stability and strong yields, as well as few concessions.
In the last year, foreign buyers have scooped up four Dallas office buildings. Brookfield Asset Management out of Canada paid $68 million for Riverside Commons, and the Japanese Kajima Corporation purchased One Telecom for nearly $42 million. Gruppo Haddad of Mexico bought the other two. Meanwhile Bahrain-based Investcorp purchased nearly $100 million worth of student-housing properties in Austin last November, including University Estates at Austin and University Village at Austin.
Christopher Hoeffel, managing director with Investcorp’s real estate group, says the “recent acquisitions are consistent with our strategy of targeting high quality assets with what we believe are attractive yields and the potential for near- and long-term upside.” Collins advises there’s more to come, as a lack of opportunities in their own domestic markets are pushing more and more foreign buyers into the U.S.
And sellers are taking note. Jeff Price with JLL’s Capital Markets just brought a 1,675-unit multifamily portfolio called Legacy North to market in Dallas. He says the prime location, coupled with a thriving economy, will make this offering extremely tempting for foreign buyers.
“It’s not just Middle Eastern buyers looking into Texas. Between July and November last year, five apartment offerings in Austin were snapped up by investors from Canada to Germany,” said Price. He argues that unrest in places like Ukraine and other parts of the world will only increase attention to the safety and security of the U.S, “I have no doubt Dallas will be the next prime target.”