Since 2001, top gateway cities were magnets for major real estate investing – is that trend continuing or are institutional (and other) investors now looking at secondary markets (Austin, Houston, Denver, San Diego, Tampa etc)?

Investment trends by market depend on the type of institutional investors involved. Asian capital investors are still quite risk averse compared to other investor groups, and due to the fact that a lot of Asian institutions are still fairly new to the U.S. market, it’s not surprising that they are still focusing on the top tier gateway cities, ones that they are familiar with and comfortable with. However, as this group of investors start to gain some experience in and knowledge of the US CRE market and see that their expected return in these top tier markets is being squeezed beyond their comfort zone, I believe they will quickly start to look at secondary markets much more seriously. They already know this, but are often prevented by their own internal investment criteria and risk control policies, which usually tend to lag behind the realities of the foreign investment markets.

For other foreign investors who may be more familiar with the U.S. market, we are already seeing increased investment activities in what would generally be considered as secondary markets like Austin, Raleigh-Durham, and Denver, but they still look for high-quality assets or well-located assets with an upside with some repositioning or lease-up work. As technology hubs increase in their size and number in various sub-markets around the country (think Apple, Facebook, Google, et al), more job opportunities are created, more millennials are attracted to those cities, and naturally demand for offices, retail, and other real estate will go up, creating new opportunities for investors.

The popularity of secondary cities have a lot to do with the shift and trends in the labor force. Millennials and young professionals in cities like Tampa and Denver tend to stay and work in these cities, instead of relocating. The amount of salary they make, paired with low cost of living, quality of living and access to a broad array of amenities all contribute to their decision to make these cities their home.  Tech firms in these secondary city markets especially, have benefited from their ability to recruit and conserve an important employee base and, as a result, more and more tech firms are setting up headquarters in these cities, taking advantage not only of this key labor force but also of still relatively low office rents.

Investors are also increasingly considering the appeal of cities like Nashville, Charlotte, Indianapolis, Louisville, Portland, Austin and Raleigh-Durham. These cities are showing strong population gains – and are popular with the all-important millennial demographic. These urban centers provide manageable environments with a better value proposition. However, people are not turning to these housing markets solely because they are attractive. Some of the largest markets in the country have become so highly valued that the average domestic investor is better off looking elsewhere – and that elsewhere is these cities that were previously undervalued and overlooked. 

With employment on the rise, has the office sector shown healthy signs of growth AND how has “creative office” impacted office sector robustness? 

There certainly is impact on the traditional office sector from these creative office trends. However, the impact has not been very significant. There’s still a very decent amount of demand for traditional office spaces especially from the financial and professional services sectors – including from banks, accounting and law – and from the government. That being said, many interesting new office designs are emerging with a focus on attracting firms with a younger labor force. Offices like Google, Facebook and many other tech companies have pushed the creative office concept to the front page, and the kind of relaxed and user-friendly collaborative design approach favored by these companies is a magnet for millennials and other younger workers.

Demand for creative office space by tech companies is strong on both coasts as well as in secondary cities across the country. As the tech industry labor force grows – filled with millennials who will soon represent almost 40% of the total workforce in the U.S, – the appetite for creative workspace will grow with it. Tech firms seek spaces that foster more open communication and a relaxed feel-at-home environment combined with the unique design elements that speak to the firms’ culture. Ultimately, this means more and more companies will start to look for flexible space hat can accommodate the specific needs and aspirations of a young workforce – a trend that will impact the leasing market and potentially, office building valuation.

Has the recent volatility in the Chinese economy led to increased Chinese investment in U.S. real estate as wealthy Chinese (and other Asians) seek to move their funds overseas?

Yes it has. And volatility or uncertainty isn’t the only reason that these investors have increased their investment activity in U.S. real estate.

Here are some additional key factors:

• There has been some positive policy shifts from Beijing. The government has increased the limit of investment in overseas real estate. In 2015, the Chinese government took steps to streamline the complex set of approvals necessary for all outbound investment. For a country that usually has the most complex procedures, the change is hugely welcomed. Some recent transactions have showed that the transaction and approval time has been decreased by as much as 5 months.
• The overall economy slowdown has pushed everyone to think of other ways to invest
• The low interest rate environment especially has encouraged firms and wealthy individuals to find new opportunities to increase their wealth and returns.
• Pension funds and mutual funds have to look for new ways to meet their return obligation for their investors. Real estate has always been a type of investment that Chinese people feel more familiar and comfortable with, compared to other financial instruments or other high risk investments.
• The increasing popularity of EB 5 among Chinese people- particularly young parents who are looking for ways to advance their children’s future by enabling a U.S.-based education and the opportunity for their children to live in the U.S.

According to RCA, as of May 2016, Chinese companies have purchased or are buying 47 U.S. properties worth $9.3 billion. That makes the Chinese the most active foreign buyers in the U.S., with more than double Canada’s $4.2 billion worth of deals. By contrast, for all of last year Chinese investors did 71 U.S. deals worth $6 billion. We can now clearly see the upward trend of inflow capital to U.S. Real Estate market from China.

Chinese investment abroad has soared as the Chinese economy has slumped over the past year. Investors are looking at foreign markets to protect their wealth against the volatility at home.The recent low interest environment in East Asia has also contributed to the increase in volume and size of capital outflow to foreign real estate investments. And, as previously noted, the Chinese government has loosened the restriction of foreign investment limit for many Chinese institutional and individual investors, which helped ease the way for increased investment in the U.S.

Even as the U.S. market slows down, buyers from Asia, the Middle East and other parts of the world often are more motivated than domestic U.S. investors. Many are eager to diversify. Others are concerned about risk in their own countries. (Source: WSJ)

Where are private equity investors – including global ones – looking to invest?

The answer to this depends on what type of Private Equity firms are being looked at and what their investment goal is.

• There’s a group of new PE funds that has just started to invest in real estate since these assets that previously were not a focus – are now being seen as a secure return option.
• Diversification needs also play a role – especially for foreign funds such as is the case with Asian PE firms. These funds are looking to hedge the risk from other investments in the fund, allocating certain percentages of their capital in Real Estate. Also keep in mind that until recently, Chinese Private Equity was prohibited from making investments in foreign real estate markets, so again the positive policy change is pushing even more capital out of China.
• Large Real Estate PE firms like Blackstone have always been active, in any kind of market environment. For example, Blackstone is about to close another multi-family deal in NYC, for $620m, an 894-unit complex less than a mile from Stuyvesant Town (its landmark 2015 purchase)

– And, many domestic PE funds are also investing overseas, CalPERS has just invested over $250m to JP Morgan’s Asian Fund, which started fundraising earlier this year focusing on real estate investment across Asia. From this we can see that cross border activities are in play in both directions.

Private real estate funds have more money to spend than ever before, but that’s not necessarily good news for the real estate market.

As of March, private real estate investment funds worldwide had $231 billion in aggregate dry powder – or capital commitments from fund investors ready to be spent. In one sense this is great news for the global real estate market universe.  Most private real estate funds have fixed investment periods, meaning they are contractually required to spend their investors’ money by a fixed date (typically within five years). However the reason the dry powder is at a very high level is also because fund managers are having an increasingly difficult time finding profitable investments.

In 2015, there was notable activity that occurred in buying existing limited partner positions in private equity funds. Some very sizable funds have been raised, which coupled with some investors’ desire to consolidate or streamline the number of managers they have, has led to more buying and selling of existing interests in limited partner positions. Those types of transactions are expected to continue in 2016. That activity is a positive for the broader private equity market as it brings more liquidity to a segment of the market that has typically been considered a niche business.

How will the retail sector continue to transform itself in urban infill locations?

The future of retail is obviously a big topic. Retail transformation is inevitable right now, and we’ve seen continuous transformation already in this sector year over year, it’s just going to change even more over time.

There are a few obvious drivers of the transformation:

• Online retail giants like Amazon obviously have changed the way people shop. However what’s interesting is the fact that Amazon is opening its own brick and mortar stores, not only for books but also for merchandise typically carried by Walmart and Target. It will be interesting to see how this move plays out for them.
• Millennials occupy leadership buying positions. Millennials have now become the main workforce and therefore also represent first-rank consumer power. Their purchase and shopping behavior differ largely from their parent’s generation. Online shopping is obviously their preferred shopping methodology, however the physical store is not completely losing its appeal either. Younger generations look for the “experiential” side of in-store shopping. And this is not only true for what is available to them in stores like Samsung, Apple or Microsoft for technology gadgets, but also what they can find in more traditional retail settings such as apparel and clothing stores.  Retailers of all dimensions are actively seeking new ways to attract shoppers by creating a different and immersive experience for them.
• Shopping centers (not malls) must focus on what makes provides the greatest return on investment and these days those returns are increasingly being derived from restaurants and other entertainment components, like platinum-level dine-in theatres.
• Many popular Instagram users have become the target for clothing brands where they are paid to wear the clothes and post on the account. Instagram users can directly find the piece online by clicking on sponsored links, etc. All of these modalities are aimed at encouraging even more impulse buys.

These are some of the trends that are transforming the way people shop, but that also have significant impact on real estate. Many shopping malls will need to reinvent themselves – substituting entertainment, healthcare, education and adventure for what were once traditional anchor tenants. So when looking at retail, we have to be on top of the most recent trends in shopping and recreation – something that demands that we add experiential, boutique and lifestyle stores to our retail spaces if we are to achieve success.