2020 will yield a bumper crop of news surrounding the U.S. presidential election and the geopolitical and economic events that may have some bearing on its outcome. Investors will be well advised to pay little heed to this news—a phenomenon known as “headline risk.”
Headline risk can be an advantage. Most investors tend to overreact to macro/geopolitical risks and underreact to the micro/local ones. So, rather than getting spooked by headlines, investors are best advised to ignore them because they have limited impact on their business.
Investors should take a more cautious approach in countries like Argentina and Russia, which are highly sensitive to the impact of geopolitical events on their local economies and their capital flows. We have studied the impact of major geopolitical events on economic and jobs growth in the G7 countries for more than 50 years. And what we have learned is that big political events have almost no impact because the forces of the global economy are much stronger.
Now, notwithstanding that geopolitical events shouldn’t impact CRE investment decisions, the reality is that they do. For every rock star analyst who understands a deal down to the smallest decimal point of CRE risk, there is an investor two or three layers above them who reads the papers, calls their boss and says, “I’m scared of investing in this because of this.” The result is a dead deal and a redlining of opportunities based on irrational fears. In commercial real estate, the irrational fears of investors prevail.
What should investors do if geopolitical events cause deal flows to unnecessarily slow down? Exploit it. To echo Warren Buffett, be greedy when people are fearful and fearful when people are greedy. In CRE, that means running into the fire and buying when the market reacts to irrational fears.
Not all political risks are irrational. For example, when local risks become acute due to changes in tax laws and, more recently, changes in affordable housing laws, the market can be adversely affected. This is more challenging and more rational mathematically: How do you project 3% annual rent growth for the next 10 years if your rent growth is now capped by new affordable housing laws? High net-worth investors who don’t need outside equity or debt capital may be able to exploit these changes, but bankers will not be persuaded to make loans if these changes impact their underwriting standards.
The key is data that shows investors what has happened before when there were major geopolitical changes and the limited impact they’ve had on values. The CBRE H2 2019 Cap Rate Survey provides such evidence for some investors to keep buying while others may not. This may be what investors need in what likely will be a turbulent political year.
View the H2 2019 North America Cap Rate Survey
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