The United States remains the world’s largest, most diversified, and most powerful economy.  It is highly fragmented, and not necessarily national, but regional in scope.  A prudent real estate manager prepares him or herself to take advantage of regional trends and cycles by identifying and understanding growth and migration in regional populations, and by understanding regional demographics.

Foreign investors will own unprecedented amounts of U.S. real estate in the near future due to the decline in the value of the dollar, and these investors are poised to rake in huge returns on their U.S. holdings.  A well-diversified private real estate investment strategy has historically provided favorable overall returns, significant income, low volatility, and low correlation of risk relative to most other asset classes. 

We believe this is an ideal time for foreign investors to hold commercial U.S. real estate in their portfolios.  In particular, we believe that pursuit of this strategy is best achieved in a private investment structure which provides significant flexibility in the type of property that can be owned; which provides further flexibility in the types of value enhancement strategies employed; and which provides maximized returns through flexibilitfy in the amount of leverage that can be used, based upon investment criteria and objectives.

Benefits of Diversification

For foreign investors an investment in U.S. real estate can be an effective hedge against expected and unexpected volatility in other asset classes, and against unpredictable world economies.  While most investments are somewhat dependent upon economic cycles, the supply and demand for U.S. commercial real estate, and especially apartment developments, has delivered consistent returns time after time.  Investors reduce the volatility of their equities and bonds, especially in the world market, by adding U.S. commercial real estate to their portfolios.
 
Real Estate Returns and Volatility

Commercial real estate returns have historically exhibited lower volatility than the general investment market composed of stocks and bonds.  Real estate returns are more predictable over both the long and short terms, and real estate cycles, driven by interest rates and overall demand, are historically less volatile.  With apartments, leases expire over the course of a year, limiting exposure to lease roll over.

Since real estate typically trails the overall economy by months and sometimes years, a prudent manager who anticipates shifts and cycles will take corrective measures in advance of buy or sell markets.  For example, if we anticipate that occupancies will fall in a local market or in the greater economy, rent concessions or lower lease rates can be instituted in order to keep properties occupied during down cycles.

Conversely, when the greater economy is in an up cycle, the real estate market is likely to follow with an increase in occupancies.  A prudent manager, believing that CAP rate compression or other favorable conditions are driving prices upwards, will not sell property at the first sign of an up cycle.  These changes are smoother and more predictable in real estate than in equities or bond rates.

We predict that in the near future foreign investment and ownership of U.S. real estate will increase fourfold, from 3% to 12%.  Over the next ten years foreign investors will make real estate their single largest foreign investment.