spectrum into select secondary high-growth markets,
primarily tech and energy markets (Exhibit 3).
Challenges Caused by Equity Flows
As some investors have returned to calling vacancy
“an opportunity” in gateway markets, the question
has arisen whether an emergent asset price bubble
With the US expected to be more stable than other
regions (Asia slowing and Europe still vulnerable),
we expect continued strong capital flows into the US
in even greater amounts for the balance of 2014 and
into 2015. Confidence in the future performance of
US real estate has been well documented, with the
Association of Foreign Investors in Real Estate citing
five of the top ten global markets in the US.
With cap rates having fallen 50 bp in office product over the year ending in the third quarter of 2014,
average pricing in the US is at 2007 levels, with gateway cities above 2007 pricing levels. Going forward,
given the expectation that interest rates will rise in
2015, future appreciation in gateway cities is expected to come from rent growth (replacing cap rate
compression as a return driver).
Despite the low level of current cap rates in gateway cities, cap rate spreads to Treasuries today are
at near long-term averages; this is in contrast to the
negative spread-to-Treasuries relationship that existed in 2007, which created asset bubble pricing.
Additionally, to date real estate equity and debt capital has been relatively disciplined, with real equity
backing acquisitions, as opposed to the de minimis
equity investments required to control transactions
at the height of the prior real estate cycle.
Are Capital Flows Sustainable?
Although cyclical capital flow drivers may abate,
they look strong for 2015, given the uncertainty
in the global economy. Additionally, the structural
changes in real estate demand are long term in na-
ture. All indications are that already strong capital
flows are set to increase in 2015, barring a “Black
Swan” event. Despite the sustained pricing rally, in-
stitutional investor allocations to real estate are on
the rise. Norges (the largest sovereign wealth fund,
at $850 billion) is focused on increasing its real es-
tate allocation from the current 1.3% to a target of
5% (to be offset by a commensurate reduction in
Capital Flow Drivers Are Not Contained to Just the US
Global economic and geopolitical dynamics resulting
in a flight to quality have not been just a US phenomenon; a heightened demand for income-producing
property is evident in global, mature, stable markets.
As a result, global income-producing real estate
transactions are up 10% year over year to $520 billion, as compared to the 20% decrease in land/devel-opment sales to $276 billion (driven by a 22% fall in
government-controlled land sales in China), resulting in a total global trading volume of $796 billion,
down 3% year over year.
Regionally, sales volumes in both the Americas
($260 billion, up 14% year to date through 3Q2014)
and the EMEA region ($190 billion, up 18%) were
much stronger than APAC sales, which were down
20%, to $346 billion.
This mimics the regional property price performance of global IPD one-year total returns through
2Q2014 of 11.2%, led by Europe, followed by North
America, with APAC lagging. Europe’s recovery reverses underperformance on a three- and five-year basis,
whereas North America has outperformed the other
regions for both three- and five-year holding horizons.
Despite global competition for international investor capital, the continued strength from US real
estate, together with modest but accelerating growth,
has reinforced the US reputation as a safe haven and
led to structural increases in demand from APAC investors and sovereign wealth funds. ;
Janice Stanton is Senior Managing Director of Investment Strategies in the Capital Markets Group of Cushman & Wakefield.
QQuarterly flight to quality have not been just a US phenomenon; property is evident in global mature stable markets.