Location, Location, Location? Globalization of Real Estate Raises Questions about Popular Adage
July 11, 2007
Ute S. Frey
UC Berkeley Haas School of Business
UC Berkeley Haas School of Business
From construction materials to office space, many facets of real estate have been transformed by globalization, according to new research from the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley's Haas School of Business.
In a new report, Senior Research Associate Ashok Bardhan and Senior Regional Economist Cynthia Kroll examine how the major players in the real estate industry – builders, brokerage firms, consulting and services firms, real estate finance firms, and investors – have extended their areas of operations beyond local markets to a worldwide base.
"People don't usually associate globalization and real estate together," Bardhan says. "But globalization of the real estate industry is now a fact of economic life."
The office space market is one area of real estate that has been dramatically affected by globalization, particularly offshoring, Bardhan and Kroll point out.
"Office markets in some developing countries are now just as expensive as in New York, or even more expensive," Kroll says. "Real estate markets are no longer independent."
Three US markets – San Jose, San Francisco, and New York – hit the top 10 list of most expensive office markets worldwide in 2000, thanks to the dot-com bubble and related financial boom. But by 2006, Mumbai and New Delhi had moved onto the top 10 list, while every US market had dropped off of it.
"A change in the leading office markets between 2000 and 2006 demonstrates how quickly urban commercial real estate markets in emerging economies can become part of the global bidding process," Bardhan and Kroll write.
The Real Estate Supply Chain
Offshoring has affected the real estate supply chain in several other ways as well. The growth in emerging markets, spurred in part by offshoring, has led to greater demand for mineral resources and building materials, resulting in a sizeable jump in the global prices of such goods.
For instance, steel consumption in China jumped from roughly the same level as the US in 2000 to more than three times US consumption in 2005, according to the International Iron and Steel Institute. During that same period, metal prices have increased roughly 25 percent, according to the US Bureau of Labor Statistics.
Meanwhile, real estate firms also are jumping on the offshoring bandwagon. Firms in such fields as design and architecture, real estate finance, and property management have transferred some back-office activities to firm divisions or outsourcers in India. Brokerage firms, for instance, are now outsourcing their real estate market research to India, Kroll notes.
US Real Estate Firms Seek Wider Opportunities
Bardhan and Kroll point to privately and publicly held development firms that have transformed their focus from a local base to worldwide operations. In search of diversification, wider opportunities, and higher returns, they leave the confines of California or other US locations for Europe, Asia, and beyond. Investors are right there with them – often in front of them – pushing for these changes, despite company concerns about risk and potential returns.
However, real estate firms with global operations are still a minority in the US, Kroll and Bardhan found. Reviewing characteristics of more than 300 of the largest US firms in real estate-related businesses (all with 500 or more employees), Bardhan and Kroll found that only 13 percent of those firms had operations beyond US borders. Firms involved in real estate investment activity, including real estate investment trusts (REITs) or other investment vehicles, had the most international business. Real estate brokerage and management firms, meanwhile, were the least internationally focused. According to a separate survey carried out by Bardhan and Kroll, Asia is the region most likely to be considered for future expansion by real estate companies.
Real Estate-Related Financial Markets
On the flip side, foreigners hold a significant portion of real estate-related financial instruments issued in the US, Bardhan and Kroll note. Foreign entities hold nearly $1.2 trillion, or 18 percent, of the $6.6 trillion overall outstanding agency debt and securities issued by such government-sponsored enterprises as Fannie Mae and Freddie Mac. China has been the largest foreign investor in such US agency bonds.
In a separate paper expected to be finished soon, Bardhan and colleague Dwight Jaffee, the Willis Booth Professor of Banking, Finance, and Real Estate at the Haas School, are exploring the effect of foreign financing on US interest rates.
Emerging Economies Offer New Opportunities
The authors see many more global opportunities for US real estate firms as emerging economies grow rapidly, and major local firms and multinationals need professional real estate products and services. Demographic changes are another factor driving global opportunities. The report points to changing household structure and size and the effects these will have on housing demand – and on opportunities for US designers, developers and investors.
For a copy of Bardhan and Kroll's research report titled "Globalization and Real Estate: Issues, Implications, Opportunities, please visit http://repositories.cdlib.org/iber/fcreue/reports/0407/.