Global Opportunities in Commercial Real Estate

Market Overview & Capital Flows

• Real estate investment returns have outperformed other asset classes, surpassing 2007 peaks for REITs.
• Global new capital targeting direct real estate totaled $320 billion in 2013, a 3% increase, with growth recorded in all regions except EMEA.
• Private and institutional investors are increasing capital deployment, moving cash previously on the sidelines into the market.
• Global CMBS (commercial mortgage-backed securities) are rising, providing additional leverage for real estate transactions.
• Tame inflation persists despite central banks expanding balance sheets and creating significant liquidity.
• Europe remains in recession with soaring unemployment, particularly among youth (30%), creating potential social unrest risks.

Regional Investment Highlights & Trends

• Ireland & UK:
  • Bill McMorrow (Kennedy Wilson) identifies Ireland as a primary opportunity due to a favorable tax rate (12.5%), young population (50% under 35), and free education system.
  • Over 500 U.S. tech companies, including Google, have European headquarters in Ireland; Google occupies nearly 600,000 sq. ft. in Dublin.
  • Dublin office vacancies have dropped to 5% occupancy rates, with rents increasing in high-quality areas.
  • The UK market is split; London is booming while the rest of the UK lags.
  • Peter Loewy (Westfield) notes two London malls (Shepherd's Bush and Stratford) generated nearly £2 billion in combined sales.
• United States:
  • Nick Gorsh (American Realty Capital) and Barry Sternlieb (Starwood Capital) identify the U.S. as offering the best risk-adjusted returns due to lower volatility compared to emerging markets.
  • The U.S. debt market is experiencing an "aberration" with cap rates significantly higher than financing rates (e.g., 2.45% fixed on 5-year net lease debt), creating a massive spread.
  • Sam Zell (Equity Group Investments) highlights the U.S. multifamily market as a core strength, citing 7% cap rates on older properties in secondary markets like Salt Lake City.
• Latin America:
  • Sam Zell maintains strong bullishness on Brazil due to population scale (180 million), self-sufficiency in resources, and an investment-grade trajectory, though growth is expected to be slower than the previous decade.
  • Barry Sternlieb views Mexico as the current "hot kid on the block," citing energy reforms and capital market innovations like fibra executions that lower hotel financing rates.
  • Colombia is identified as potentially the best country in Latin America, with oil production jumping from 100,000 to 900,000 barrels/day following the decline of FARC.
  • Brazil's economy shows signs of slowing, with vacancy rates in São Paulo doubling and absorption shrinking, though Rio de Janeiro remains active in logistics due to construction difficulties.
  • India is deemed less attractive for institutional investors due to corruption, slow pace of business, and a time horizon mismatch with current investors.
  • Argentina and Venezuela are cited as high-risk environments with unstable political regimes.
• Japan:
  • Japan's debt market has shifted from 3-year terms to 7-year fixed financing at approximately 1.3% due to government policy changes.
  • Bill McMorrow's Japanese apartment portfolio achieves 96% occupancy with zero delinquency, as eviction processes are legally difficult, effectively retaining tenants.
  • Investors are currently financing existing assets in Japan rather than acquiring new ones, given low cap rates (4-5%) and flat rents.

Retail Sector Dynamics & Technology

• Online sales represent only 10% of U.S. retail; 70% of customers research online but purchase in-store.
• Westfield's same-store sales growth was 6.5% in the U.S. and 10% (potentially 20% in specific reports) in Brazil.
• Peter Loewy predicts a shift toward larger "showroom" formats (e.g., Restoration Hardware expanding to 60,000 sq. ft.) where physical presence complements online/catalog sales.
• The trend involves concentrating retailers into better assets and larger formats while closing marginal stores, creating a merged physical-digital ecosystem.

Security & Insurance Risks

• Security costs now account for 25% of operating expenses for retail assets, surpassing cleaning costs since 2001.
• Peter Loewy emphasizes the structural disadvantage of the U.S. insurance market regarding the Terrorism Risk Insurance Act (TRIA), which lacks the federal backstop found in the UK, Australia, and Canada.
• The industry is pushing for TRIA renewal to maintain global capital attraction, as the U.S. faces higher terrorism risk exposure without a government reinsurer above $50 billion.
• Westfield has digitized all mall plans (entries, exits, fire hydrants) to facilitate rapid response by local authorities, a system tested during the Boston Marathon bombing.

Future Outlook & Strategic Advice

• Bill McMorrow: Focuses on the Western U.S. apartment market, UK secondary markets, and Ireland for the next 12 months.
• Nick Gorsh: Advises sticking to "boring" asset classes (net lease, hospitals, grocery-anchored) in the U.S., Canada, UK, Germany, and Netherlands; warns investors to lower yield expectations.
• Sam Zell: Identifies Mexico as the top opportunity, specifically the interior manufacturing hubs benefiting from the disruption of Asian supply chains post-Fukushima.
• Barry Sternlieb: Targets micro-market opportunities in U.S. cities (e.g., Charlotte office buildings) and anticipates a tripling of European investment volume.
• Peter Loewy: Projects the return of bookstores to malls in a new format, citing the cyclical nature of retail and the human desire for physical bookstores.