The Brexit vote in June demonstrated how sensitive U.S. commercial real estate and lending markets are to the global economy, and the news was awash with dire predictions about what impact the decision could have long-term. For the definitive look at what commercial real estate investors can expect in a post-Brexit world, EDR collaborated with our sister company Trepp, the leading provider of data, analytics and technology solutions to the global securities and investment management industries, on this white paper. This new research, What CRE Investors Can Expect in a Post-Brexit World, takes a unique look at the impact of Brexit on investment, CMBS/lending and environmental due diligence markets here in the U.S.
There was copious talk that if Britons voted for Great Britain’s exit from the European Union, markets, specifically commercial real estate, would be impacted. Markets don’t like uncertainty, and the Brexit vote has provided plenty. It’s no surprise that there has been a general pause in investment activity and some are expecting the British property markets to suffer as companies relocate to other E.U. countries. But the decision is proving to be benign for the U.S. property market. The thinking had been that uncertainty in Europe would prompt institutional investors to plow capital into the safe haven of the U.S. property market. But data from EDR, which tracks Phase I environmental site assessments, shows that such a migration hasn’t happened yet. This research delves into which markets have seen an increase and which a decrease in the volume of Phase I assessments – a leading indicator for investment-sales activity. Having a potentially larger impact on property markets would be growing regulatory pressures, on both bank and securitized lenders, which could affect investor demand.
U.S. Real Estate Market
The global community has been amassing capital during the past several years for commercial real estate investment, and the volume of foreign capital being plowed into U.S. properties is at record highs. Investors worried about what implementation of the Brexit referendum will do to the British economy and to a lesser extent, Europe’s are incentivized to consider other global markets. Investors are widely expected to flock to the U.S. market, which is perceived as a safe haven in a time of turmoil.
“Institutional commercial real estate fund-raising is a primary driver of our transactional-focused business, and many of the investors we work with have a global view. The uncertainty in the U.K. post-Brexit, and perhaps Europe as a whole, provide them with an incentive to allocate more funds to U.S. real estate markets.”
~Joseph Derhake, PE, Chief Executive Officer, Partner Engineering and Science, Inc., a leading property due diligence provider
EDR Insight’s ScoreKeeper model tracks environmental due diligence activity, measured in terms of the volume of Phase I environmental site assessments, for the U.S. market. Since due diligence is performed prior to a property transaction, Phase I ESA activity is a leading indicator of commercial real estate investment—much like the Architectural Billings Index is an economic indicator of future commercial real estate construction.
For a look at whether Brexit impacted U.S. property markets, the accompanying table compares Phase I ESA activity this past July and August with the corresponding period of 2015. The data isolates the volume in the top 20 primary markets relative to the rest of the top 100 markets, as well as the U.S. market overall. The results suggest that pre-transactional due diligence activity post-Brexit was flat to declining overall with little difference in the top 20 primary metros relative to the rest of the U.S. When viewing these year-on-year comparisons, it is worthwhile to note that 2015 was the strongest year for property investment markets since the downturn. For instance, there was a roughly 10% decline in investment activity in major global cities this year when compared to 2015, even before Brexit.
The robust inbound foreign investment of the past few years should intensify in the wake of Brexit. If this happens, it will be good news for clients supporting deals in metros like New York City, Boston, Chicago, San Francisco, Los Angeles, Washington D.C., and other cities that would be in vogue as targets for the risk-averse.
So far, Brexit has not had any discernible impact on U.S. commercial real estate markets. But the expectation remains that as foreign investors seek safe havens for their commercial real estate dollars, they’ll turn to major U.S. markets. So the ultimate outcome of the Brexit Referendum is far from certain, which injects another layer of uncertainty on top of the Presidential election and other global political/economic uncertainty. The U.K. faces years of negotiations over its exit from the European Union, and no one knows whether other countries will follow the U.K.’s path, potentially causing the E.U. to collapse. In the meantime, lenders and investors are proceeding with caution, but for reasons that have more to do with U.S.-based factors than with what is happening in the U.K. For instance, in the CMBS market, pending risk retention rules are a much bigger issue than Brexit. The more pressing issues that are impacting the U.S. commercial real estate markets are the likelihood of an interest rate increase by year-end, increased financial regulation, the market pause that typically characterizes the months leading up to a Presidential election and growing speculation about the timing of the next cyclical downturn—these factors, combined with Brexit’s uncertainty, could make investors more skittish than usual leading into the fourth quarter.
FOR MORE INFORMATION
For the complete Trepp-EDR white paper on how Brexit is expected to impact commercial real estate, the CMBS market, lending and more ScoreKeeper data on individual metros, read the full white paper, What CRE Investors Can Expect in a Post-Brexit World, here.
Susan Persin Senior Director of Research at Trepp, Susan_Persin@Trepp.com
Dianne Crocker Principal Analyst at EDR, DCrocker@edrnet.com
Orest Mandzy Managing Editor of CRE Direct, Orest.Mandzy@crenews.com