In Commercial Property Executive, I recently wrote about an intriguing idea put forth by Glen Esnard, the president of Grubb & Ellis’ capital markets practice, and I want to expand upon it here. Glen suggested the following: “From a longer term perspective, look for [commercial real estate] investment capital to flow to those states that optimize the blend of balanced budgets, low taxes… low regulation and business incentives. Businesses and people are more mobile than ever, and intelligent capital will go there first.”
It’s tempting to think that commercial real estate investors might hold the same sway over states and municipalities that bond market vigilantes have with countries, i.e. ready and willing to pull their investment capital from jurisdictions that overtax, overspend and over-regulate. Bond market vigilantes can refuse to buy the debt of certain countries – Greece, Ireland and Portugal come to mind – that don’t balance their budgets, forcing them to pay higher interest rates to borrow compared with better-managed countries such as Germany.
At first blush, this theory doesn’t fit commercial real estate; investors are putting their capital to work in exactly those states with reputations for heavily taxing and regulating their citizens, both residents and businesses. Last year, KBS Realty Advisors paid $651.5 million for the recently completed 300 N. LaSalle, a near-record for Chicago of $500 per square foot. This year, Illinois legislators boosted the corporate tax by 45 percent and the state income tax by 67 percent, prompting several governors to invite Illinois businesses to relocate to their states. Would KBS have reconsidered its purchase had it known what the state was about to do? Maybe, but I would guess not since investors are also bidding up property prices in California and New York, two other states with big deficits and heavy regulatory burdens. Nor are property investors beating a path to Indiana, North Dakota and Alaska, states whose public finances are in relatively good shape.
Yet I wonder if it’s a different story when you move beyond the high-profile core assets that have become magnets for REITs, pension funds and private capital. Consider the following proposition: States with well-managed finances are able to offer a better overall package of incentives – tax abatement, site location, workforce training – to relocating businesses, and nearby properties would see spillover demand including restaurants, apartments and space suitable for contractors. But is this the same as real estate investment capital (as opposed to non-real estate businesses) moving to these states? Not in a big way unless you get enough relocating businesses to form an industry cluster such as the automotive industry in the South or the biotech industry in San Diego and Boston. When that happens, you may see some outside capital targeting commercial real estate in these areas.
Overall, I give Glen’s theory a qualified “no.” Sorry Glen, but keep those thought-provoking theories coming my way. I need more fodder for the blog.
January 31, 2011 at 5:47 pm |
Bob,
Interesting theory… From my perspective in high-cost-of-doing-business California, I see two countervailing trends … paralleling what’s happening in the economy and American’s lives…. one supporting Glen’s theory, and one refuting it.
On one hand, there’s an investment flow to where quality talent lies: SF Bay Area (tech), NYC (finance), Chicago (finance), Washington DC (gov’t relations) and a few other regions that are also at the top of their game. There are places that seem to succeed in spite of gov’t actions. (Remember NYC gov’t once almost dropped dead!)
Those places can’t digest all investible funds destined for the U.S., though; so money has to flow to other places. The idea that locales with sound, balanced government policies will get more than their fare share of these funds makes sense to me. How to measure what is a sound policy, though? What is the ideal trade-off among competing desires: biz incentives, low-taxes, low regulation, etc. And wouldn’t non-government-created quality-of-life factors such as climate, landscape, etc. also come into play?
Interesting to ponder while showering.