Industrial Real Estate Price Recovery

1st Quarter 2012 Hotline

Market Watch
Southern Industrial Development

by Joe A. Hollingsworth, Jr.

While there are many factors that drive a real estate price recovery, one increasingly dominant factor in this recovery is the global demand for US assets including real estate assets. With Europe’s crisis meandering along a dangerous path, China’s growth clearly slowing, and Japan struggling against the ill-effects of their natural disaster and aging population, the abundance of liquidity has few available “safe” options.

While the S&P stripped the US government of its coveted and long-held AAA rating, it almost looks foolish in retrospect as the demand for US government debt is nearly “insatiable,” as one Goldman Sachs economist put it. Even in the face of significant deficits, Treasury rates, from bills to the long bond, continue to remain at record lows.

As yields on Treasuries have stayed low, many foreign investors have sought other stable US assets including real estate. The lowered dollar combined with a growingly-durable recovery lead many foreign investors to believe they are getting a strong double yield: (1) recovery in US fundamentals will improve the asset values plus (2) a stronger dollar over the coming years will drive that underlying yield even higher.

While there are many reasons to be concerned about the recovery or US fiscal balance, foreign investors are concluding that the risk in the US to long-term stability is less than elsewhere and are continuing to increase their holdings. Foreign investors typically stay close to very major markets when investing, but the domestic sellers use the proceeds to reinvest across a wider geographic profile enhancing liquidity more broadly.

While alone this cannot change the direction of the market, it certainly adds a positive force in pushing real estate prices higher, provides equity capital for new projects, and can yield new debt sources for refinancing the coming wave of CMBS maturities.

“Joe Hollingsworth participated as one of our first equity investors. In addition, Joe Hollingsworth has served as a board member and leading advisor for strategic planning and direction.” — Scott Kelley, President and CEO, Service Center Metals