Why Chinese Investment Is Driving The Bay Area Residential And Commercial RE Markets

Our friend, Corey Weinberg, writes in this San Francisco Business Times article what we have been seeing over the past several years.  Specifically, Chinese investment has been driving the Bay Area real estate markets, and this is expected to be even more pronounced in 2015.

commercial“The $296 million sale of the First and Mission Streets mega-development to Beijing-based Oceanwide Holdings, which I reported Wednesday, is one of the boldest moves by a Chinese developer in the Bay Area. The region has also seen notable Chinese investment in luxurious San Francisco condos, massive Oakland mixed-use plots and San Jose office towers in the last couple years.

Chinese investors aren’t just interested in the region or the country because of our hot real estate market. They have spent more than $600 million on Bay Area real estate during the last two years, according to Real Capital Analytics, for reasons that are more complicated.

Here are six reasons why Chinese real estate companies want a piece of the action:

1) The Chinese real estate market is overheated

A report by Knight Frank says that Chinese investors have set their sights toward the western world mostly because their own residential market has cooled significantly. As a result, the value of Chinese investments in U.S. real estate grew from $600 million in 2009 to $12 billion in 2013.

That’s in part because the Chinese government has put cooling measures in place to weaken demand, while the amount of residential space that sits vacant has shot up 80 percent since 2010. Developers are now in “cutthroat competition” in China, forcing them to get creative for where they park their capital.

2) Chinese companies have more freedom lately

Chinese companies looking to invest in overseas real estate were handcuffed until recently. But starting in 2013, Chinese companies could invest $1 billion abroad instead of just $100 million. Insurance companies could double the amount of their assets they put in real estate, according to Knight Frank.

“Prior to 2011 there was virtually no outbound direct investment from China into commercial real estate. A few years ago the Chinese government started to relax numerous restrictions and actively encourage outbound investment via its ‘go out’ policy, so it really was a sea change,” said Robert Hielscher, managing director of JLL’s capital markets group.

3) U.S. and China got friendly and expanded visa limits last year

Don’t forget about President Barack Obama’s announcement last fall to extend visas for Chinese business people, students and tourists in order to spark investment. That’s helped open more doors for Chinese companies to open offices and for Chinese nationals to buy their own homes here.

“It’s made a tremendous difference in the flow of people being able to get in and out of the country,” said Skip Whitney, executive vice president at Kidder Mathews, who advises investors in China, Hong Kong and Southeast Asia on West Coast properties.

4) There’s been more matchmaking

Bay Area real estate developers have also received more help from city officials with finding Chinese capital partners. Former Oakland Mayor Jean Quan helped link East Bay-based Signature Development Group with Zarsion Holdings in 2013 to help pay for the massive Brooklyn Basin development.

China SF, a nonprofit that works with San Francisco’s Office of Economic and Workforce Development, also helped bring together the off-market sale of First and Mission to Oceanwide.

“We’ve been looking at real estate for last year and a half,” said Darlene Chiu Bryant, executive director of China SF. “We created a book of properties interested in inbound investment” to show Chinese companies.

5) Buying big U.S. commercial property makes headlines

There’s no better way for a Chinese company to get name recognition overseas than investing in a trophy property. That’s why more Bay Area business and political leaders know Vanke – not because of its $81.3 billion in total assets, but because it became the joint venture partner for Lumina. Even though Oceanwide has more than $5 billion in revenue, not many in the United States had heard of the developer until they paid $200 million for a downtown Los Angeles property in 2013.

“It’s also a way for these Chinese companies to become more visible international. If you’re the first (company) to buy a building in New York or London or San Francisco, that’s unbelievable PR in addition to the value of the specific deal,” Hielscher said.

6) San Francisco has started to look more like Shanghai, kind of

China has more than 70 towers taller than San Francisco’s tallest building, the Transamerica Tower. Yes, San Francisco hasn’t cared for height very much, but that’s starting to change as the Transbay district pops up. One of the buildings Oceanwide will build will be the second-tallest in the city at 910 feet.

“It’s fortuitous and not totally coincidental that this type of interest is coming as San Francisco seems finally to have understood that verticality makes for a better city and it’s finally setting itself up to be a denser city with a 24-hour lifestyle,” said Greg Flynn, CEO of Flynn Properties, which has retained a minority stake in 225 Bush St. after selling it to Chinese developer Kylli Inc. last year.”

The flip side??  If the Chinese government does anything to tighten the flow of money out of China, we’re going to see a transitional period as the markets shift back to a more traditional model.  No doubt that will cause some angst in the markets, and we’re likely to see some significant turmoil when that happens.

Shopping Malls To Become Extinct?

CNBC Online has a recent article, 7 Bold Commercial Real Estate Predictions, that we find pretty interesting and a great read.  Over the next 25 years commercial real estate will be buffeted by changes in demographics, technology, globalization, economic and environmental realities and a host of other trends.  So what will the Commercial Real Estate landscape look at by 2039?  While we could debate each prediction endlessly, let’s take a look at just the first one and see what you think…

Most Shopping Malls will be extinct.

shopping mall exterior

“The world of the American shopping mall, said Kenneth Riggs, president and CEO of Real Estate Research Corp., “has been a Darwinian environment since the 1990s with the advent of big-box retail and the ‘Wal-Marting’ of the world—and it will stay that way.” In other words, expect malls to continue their decline due to the rise in e-commerce, with only those consistently producing very strong revenues still doing business in 25 years.

“As the J.C. Penney’s and Sears continue to lose market share to online retailing, you’re going to see more dead malls where the anchors go dark and ultimately are worth only the land they’re built on,” said Tom Bohjalian, executive vice president at Cohen & Steers, which was the first investment company to specialize in listed real estate.

Teardowns may not be the only way to capture value in defunct malls, though, said Rick Fedrizzi, president, CEO and co-founder of the U.S. Green Building Council. He predicts that with repurposing, they’ll be a useful resource when our way of life swings back to revolving around more compact communities. “Established places like shopping malls will become like town centers, where people can come together, where their doctors and day care will be, where they can gather after major devastations.””

We agree that e-commerce is likely to grow over the next 25 years, and that some of that will be at the cost of traditional retail. Yet as we have seen over the last several holiday shopping seasons, brick and mortar vs. e-commerce is not a winner take all battle.  The American consumer will ultimately decide which form of shopping they prefer, and we’re betting on a basic American human instinct.

The American consumer likes to put their hands on products, to pile in the car and make a day of it – to have a physical experience when they shop that we feel isn’t likely to change radically in the next 25 years.  And while we may have practiced another basic American human instinct, overbuilding our retail space, that seems like more of a correction than a fundamental change in how we like to shop.

As retailers get more savvy in finding a way to combat the issue of window shopping at brick and mortar stores then getting a better price online, we’ll see better sales in the brick and mortar world.  Some things it’s okay to buy sight unseen, but for most items it is that physical need to spend time with hands on the product why we don’t feel most shopping malls will be extinct by 2039.