HFF Research Update for June 29, 2016: Franz Ferdinand

Wednesday, June 29, 2016

Weekly insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website.

On this day 102 years ago, Americans first received word the Archbishop of Austria and his wife had been assassinated in Sarajevo the prior day. Though the event was immediately recognized as politically troublesome, few could have perceived that, in less than 30 days’ time, the world would be at war. Russia, France, Britain, Germany and Austria-Hungary would spend the next month levying unachievable ultimatums against one another, allowing tensions to crescendo in late July and early August.

The U.S. ultimately entered the fray nearly three years later in April 1917. Today, it takes considerably less time for events overseas to impact our economy and to influence our policy.

The United Kingdom’s still-Prime Minister David Cameron has addressed Parliament at Westminster, traveled to Brussels to address the E.U. Parliament, been dismissed from further participation in those meetings and returned to London where he is, once again, addressing MPs. Amidst this frenetic pace of media and politics, there is growing sentiment there that Brexit may never happen. None of us are experts, but the obsessive coverage can temporarily fool the mind. Article 50 is not a new topic, but its importance to Brexit is the subject of increasing debate, i.e., will it ever be invoked.

Cue the Financial Times’ David Allen Green: “Three things can be said with confidence about Brexit and British politics. The first is a statement of fact: the Leave side won, but Brexit has not been triggered… The second is a statement of law. There is nothing the EU can do to force the UK into beginning the Article 50 process… The third is a statement about politics. It is perfectly conceivable that no Article 50 notification will ever be sent.” Green goes on to argue that the sentiment among MPs in the capital – which contrasts significantly with the populous – Leave campaigners’ backpedaling on economic benefits promised, devolution of politics between England, Wales, Scotland and Northern Ireland, and finally congressional malaise could all conspire to delay Article 50 to a slow death.

Time will tell. In the meantime, there has been no shortage of questions and hand-wringing relating to any potential impact the U.S. commercial real estate market may experience.

It is very difficult to locate a direct and adverse impact on property fundamentals, at least here in the United States. Conversely, shares of REITs traded on the FTSE have been unequivocally hammered as investors anticipate a dearth of tenant demand for space in the U.K. until more clarity prevails. But one area that provides some insight to America’s potential benefit are capital flows from offshore investors.

The imagery below demonstrates a significant decline in foreign investor’s acquisition of U.S. commercial real estate in the first 90 days of 2016, compared to the same time period in 2015. What you should focus your attention to is the percentage of total transaction volume that foreign capital represented. In this context, offshore capital has merely reverted to the mean. At 9.4 percent, the figure is very in line with market share captured in 2011, 2012, 2013 and 2014.

Expanding on this analysis, Morgan Stanley takes a sharper look at Real Capital Analytics data in a report issued this morning. Therein, the U.S. market’s position relative to the rest of the world is of particular interest. From this viewpoint, the U.S. should very well continue to benefit from uncertainty/volatility overseas. Richard Hill writes “…cross-border flows have been increasing in recent years, and the U.S. has been capturing a growing share that reached 30 percent YTD. This indicates that foreign investors are seeing U.S. commercial real estate as an increasingly attractive investment on a global stage.”

HFF’s Global Capital Team meets today in Dallas to discuss market conditions and strategy for continuing to access offshore capital for our clients as we move into the second half of 2016. Obviously, there is no sense that the U.S. is losing market share. And moving forward, there should be no shortage of motivation for interest in our assets.

About Jimmy Hinton

Mr. Hinton serves as managing director of HFF and is responsible for the firm’s national research efforts. Mr. Hinton works with the executive management team, assisting in investor relations and providing both HFF employees and firm clients with in-depth analysis of economic, property and capital market trends. Additionally, he provides extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton works with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

During his tenure at HFF, Mr. Hinton has supported the execution of more than 150 commercial real estate transactions totaling more than $4.5 billion in 20 states. Mr. Hinton has experience in fixed- and adjustable-rate debt, mezzanine debt, construction loans and joint venture executions on behalf of clients engaged in the acquisition, development and recapitalization of property types including multi-housing, industrial, office, retail, medical office and storage properties.

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