Global Market Report for Commercial Real Estate Investors
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DARBY: Hello! This is Darby Worley, your host for the Capital Synergies Talk Show for commercial real estate investors. Capital Synergies is brought to you by Steelhead Capital, your commercial loan advantage. Today, we have with us, Mr. Dan Fasulo, Managing Director for Real Capital Analytics. Dan, welcome back to the show.
DAN: Thank you for having me.
DARBY: So, let's go ahead and hop on to the interview. So your focus is on global market for commercial real estate. Most of our listeners are U.S. investors, but increasingly, we hear of overseas opportunities that may be getting more attractive while our own markets recover. Do you see an increasing number of U.S. investors making that leap into the global market today?
DAN: We are seeing more and more U.S. investors interested in opportunities in emerging markets around the world. At Real Capital Analytics, our client base is really the institutional investors of the world.
DARBY: Right.
DAN: And it was really our clients that drove us to track data...
DARBY: Really?
DAN: ... throughout Asia and Europe over the past couple of years, and, you know, we began in 2006 and, you know, we were getting feedback from all of our investors, many of them are U.S. based, that, "Hey, we want to invest our capital over in Asia, over in Europe, but we just can't get comfortable with the type of information like the way you guys provide it here in the States."
DARBY: Right, right.
DAN: So, there's definitely an education process going on right now, but if you go across the board, almost every major global property player based here in the States has already announced their intentions to increase their allocations overseas.
DARBY: Yeah, and that really only makes sense.
DAN: Yeah. CalPERS, the largest U.S. pension fund, has already stated their intention to move their overseas real estate allocation to 50%, five-zero, from 15%.
DARBY: Wow.
DAN: And when you're talking about a multi-billion dollar pension fund, you could see the capital adds up pretty quickly.
DARBY: If you were to gauge the flow of U.S. dollars entering global markets, I mean, what kind of deal flow are we seeing?
DAN: You know, it's this...there's certainly this wave of geographical diversification going on right now. You know, kind of a way what happened in the stock world about 10 years ago where everyone realized, "Hey, we only have U.S. equities, we should really diversify geographically." And we're right now in the beginning of that wave, and I think the effects of the credit crunch and the domestic slowdown in the economy we're seeing here in the States has only speeded up that process and interest for U.S. investors to invest more capital overseas for diversification purposes.
DARBY: Okay. So in terms of the flow of capital, you know, it's heading out in the near future, what do you see about the longer-range future?
DAN: Well, I really see this trend continuing until investors based in the U.S. feel like they have the appropriate geographical split to get the best returns for their portfolio that are, you know, risk-adjusted. You know, there's a lot of risk in having your entire portfolio in just one country right now, and if that country, you know, undergoes economic downturn, you know, all your eggs in one basket, and every one's realizing the benefits of geographical diversification now.
DARBY: Okay. So, what about the other direction, you know, in terms of the inflow of foreign dollars into domestic acquisitions? We've seen a couple of major landmarks here in New York purchased by Middle East investors just recently; can you comment on that trend?
DAN: Yeah, this is a big week in New York with the announcement that the Chrysler Building was sold to the Abu Dhabi Investment Authority, basically the southern world fund of that country, and, you know, we've seen more and more trophy acquisitions here in the States by overseas investors, especially from the Middle East. It's a pretty simple equation. You know, these groups right now are benefiting from the run-up in oil prices. Their coffers are full of capital that needs to be placed in investments throughout the world, and, there's only a finite amount of places for them to invest their capital and, you know, they try to do it in a most efficient process that they can. And that's why they look for larger assets to buy, you know, billion-dollar plus, and there's just only a finite amount of property in the world that's worth a billion dollars.
DARBY: Yeah.
DAN: So, any time one of these trophy assets, like the Chrysler Building, does come on the market, we'd certainly seen a tremendous amount of bidding activity from foreign investors.
DARBY: Okay. Let's move on to China. The last time that your cohort, Pete, was with us, we spoke briefly about the China market-the opportunities, maybe even some of your concerns with pollution in the upcoming Olympics. What are your thoughts on China these days?
DAN: Well, it's just a tremendous market. We've been tracking a deal activity there for about two-and-a-half years now and it's already the fourth largest country for real commercial real estate investment. An overwhelming majority is going into the development of new properties. You know, they don't have the modern assets for investors to purchase so many institutional investors are entering the country through development activity with local joint-venture partners. There's certainly been a tremendous property boom over the last several years, and, you know, driven by their just overwhelming demographics-you know, you hear about all these...all these hundreds of millions of people entering the middle class and demanding all the types of modern services that other, you know, western countries have around the world, and it's just driving tremendous demand for all types of commercial real estate: apartments, retail, office, industrial...
DARBY: It's also driving the pollution issue. See, I heard this, Dan, yesterday that they will have as many drivers and as many cars as we do within 15 years, and they already have such a horrible pollution problem. How does that play into your market goal? Do you think about that kind of thing?
DAN: There's no question that our investors are concerned in such issues and you would hope that they would learn from some of those mistakes that the U.S. has made over the years, but unfortunately, it seems that every country needs to learn their own lessons. But this new middle class...and as the population there is becoming more well-to-do, they are understanding and recognizing and starting to speak out about the environmental degradation and, you know, the need for there to be some safeguards. Because, from reports we've heard, it doesn't sound like what they're doing right now is sustainable, and it's certainly going to have an impact in the future on investment activity in the way that offshore investors look at their market.
DARBY: So what about India? You know, I hear that there have been some improvements in the transparency of their commercial real estate market recently. First of all, can you talk a little bit about that for our listeners maybe who are unaware of what types of improvements have been made. If you could kind of like back up and give us a little bit of background on that, and then also do you agree with that? Do you think they really are more transparent? Is this a good thing? What are your thoughts there?
DAN: Well, there's no question many of the emerging markets around the country are becoming more transparent, albeit that coming off a very low base, so we still have a far way to go on the transparency part to really get to the point that investors feel overly comfortable the way they do in the U.S., in the UK, throughout Europe, and Australia -- and we're not there yet. But it is improving, which is certainly a positive sign. We are seeing a tremendous amount of capital, foreign capital, flowing to India mainly also through new development. You know, many of the similar trends that are being witnessed in China with the emerging middle class... we're also seeing that in India. And I expected with a billion people and with a much younger population than China, that not many people recognize, I think that India is going to have to be a place where global real estate investors have a significant allocation of their portfolio in the future in order to capture the growth that's going to happen over the next couple of decades.
DARBY: Okay. What about Australia? The past years have seen a lot of Aussie dollars entering the U.S. market, but today, according to Bloomberg, there's talks that Australian Real Estate Investment Trust may have to sell much of the U.S.' 67 billion dollars in overseas property assets. What do you think of that?
DAN: Well, I actually just got back from a two-week Asia trip where I spent a week in Australia, in Melbourne and Sydney, so I got some great first-hand information from many of the property players down in that market. You know, Australia has a situation where there's a tremendous amount of capital that flows into the major property players there through their state-mandated pension plan that basically contributes capital to these funds, these listed funds, every year. So, they're flush with capital, but unfortunately, some of these listed funds, have gotten so large that they've basically outgrown Australia as an investment opportunity, and they've having to look in other countries throughout the region and in the U.S. and Europe. And the Australians have been a major acquirer of commercial property in the United States, mainly retail centers, over the last several years, and some of those players got caught up in the middle of the credit crunch through their use of short-term debt financing, and that certainly sent some shock waves through these companies down in Australia and many of their stock crisis have become fully depressed because many fear that this could some liquidation or...excuse me, some liquidity concerns with those companies as ongoing concerns. And you know, correspondingly, we've certainly seen little to none, no Australian investment in the States this year, and until they turn their ship around, I think it's going to be a while before they are really a player in the States again.
DARBY: Okay. We're covering a lot of ground here, but then, you know, this is the global report. Can we move on the brick countries, which are Brazil, Russia, India, and China? Now, you obviously have already talked a little bit about India and China, but what about Brazil and Russia and their, I guess, relationship with the other two countries that we've already talked about?
DAN: Yeah, they all have their unique factors right now, and with the economic slowdown in the U.S. and throughout Europe, they've been the hot buzz word of the time right now, and more and more investors are looking to allocate capital in these markets which they consider to be great places for growth on the commercial real estate side. And you know, they just have great trends and great supply-demand demographics right now that make it a very attractive place to put your capital in real estate.
DARBY: Okay. Now, let's pretend that it's you, your personal finances; which one of these emerging markets would you be most interested in if you yourself were considering a cross-border investment?
DAN: If I myself, I would say none.
DARBY: Really?
DAN: I'm a big believer in buying what you know, and my base is here in New York and I do purchase properties locally, and real estate is always going to be a local business. That being said, major investors who are interested in investing in emerging countries, I would recommend that they find a very good local partner that they can work with, where they can get their interests in line, and that's only way to make it work.
DARBY: I'm assuming you have a relationship like that overseas.
DAN: We certainly are making relationships with many local firms, and it's the best way to go to navigate those markets which, you know, there are some transparency issues, there's always political risk, and I've already heard some horror stories from investors who, used the wrong local partner and are learning that this learning curve is not going to happen overnight, and you're going to have to team up in the beginning to really learn the market and be successful there.
DARBY: Right. Of all the trends in the global or national marketplaces, which ones do you think are potentially the most problematic for U.S. investors, and then after you speak of that, I'd sure like to hear some good news in what do you think are them most promising for U.S. investors?
DAN: I think the biggest wild card right now is the economy...
DARBY: Right.
DAN: ...and where it goes...
DARBY: Yeah. What do you think of Mr. Gramm's comments that we're not in a recession?
DAN: Well, you know, we're certainly not in a technical recession...
DARBY: Right.
DAN: ...but for many folks around the country, it certainly feels like one.
DARBY: Right.
DAN: And we've certainly slowed down significantly, and I don't think the full effects of higher oil prices have really run through the economy just yet.
DARBY: Right.
DAN: I think we'll continue to see that over the next 6 to 12 months. And, you know, commercial real estate has always been directly related to the economy and, you know, that's why many investors are looking to geographically diversify and look for locations where they feel like there is tremendous growth on the commercial real estate side.
DARBY: Okay. And what about the most promising trends for U.S. investors?
DAN: Many of our clients who are of the institutional crowd of the world, many of them are still very much flush with equity capital that they've raised and needs to be invested over the next 12 months, and it's just a question of when and where. You know, right now there's a disconnect between buyers and sellers because debt cost has risen significantly and, you know, buyers are looking for a discount right now, and sellers, for the most part, are sitting on relatively good fundamentals with many of their buildings being leased and have decided to just pull their properties from the market and wait for a brighter day, as opposed to you know, selling their assets at a discount. So, this game of chicken will have to come to an end at some point because investors are in the business of investing, lenders are in the business of lending, and we all have to get back to work.
DARBY: Right.
DAN: So, I think confidence and having confidence in the market is the most important thing that we could use right now to really jump start everything and get us going.
DARBY: Okay. So, let's talk about the light at the end of the tunnel... Imagine, if you will, that it's there. What does it look like? What kind of economic or political signs are you looking for that might signal a recovery?
DAN: Well, I think it's going to be a combination of things. You know, everyone is waiting for the presidential election.
DARBY: Yeah.
DAN: ...coming up here in the fall in the States, and there is always concern that policies could change especially related to the economy. And I think in this more challenging environment, I think if there's any significant public policy changes on the economics of the tax side, it could be a perilous event for commercial real estate industry. But overall, I think the light in the tunnel, something that keeps me very bullish right now, is the fact that we haven't really overbuilt in this cycle. You know, in the past downturns, it had been created by just a tremendous amount of oversupply, and that's just not the case this time. And it's really keeping me bullish that especially in your built environments like the coast of the United States, I really see a supply-demand scenario that is very favorable for commercial real estate investors over the near term.
DARBY: Any last words of advice or encouragement for our listeners?
DAN: In this challenging time it's very difficult to understand where pricing is and I certainly recommend that folks come to our website and look at some of our information, and we're happy to help investors disseminate the market and try to figure out where the true market pricing levels are.
DARBY: So, guys, if you want to get this kind of investment research data on a regular basis, you can subscribe to these reports at your website, correct?
DAN: That's correct.
DARBY: And what's the URL again?
DAN: www.rcanalytics.com
DARBY: Excellent. So, there are things they can look at right off the bat that are out there and available all the time, but they can also subscribe to receive the reports on a regular basis, is that correct?
DAN: Absolutely.
DARBY: So, that website again, guys, is www.rcanalytics.com. Excellent. All right. Thanks, Dan. This has been a really insightful discussion on commercial real estate, and I'm sure that our listeners appreciate you spending time with us today.
So, guys, if you're an investor looking for expert assistance with financing commercial real estate, be sure to check out the new commercial loan programs offered by Steelhead Capital, your commercial mortgage advantage. Again, that web address is steelheadcapital.com. This has been Darby Worley, your host for Capital Synergies. Dan, thanks as always for joining us, and we hope to speak with you again soon.
DAN: My pleasure, Darby.
DARBY: Take care.
DAN: Bye, bye.
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