Many investors have reached the conclusion that cap rates and prices in the typical gateway cities have reached a point that it no longer makes sense to invest in these locations. The coming increase in interest rates, whether later this year or surely during 2016, will likely make these values less sustainable. I have been working with a group of Japanese and Chinese investors who have a strong desire to move large sums of capital to the US. In the case of the Japanese it is a combination of the estate tax of 65% and the struggling economy. In the case of the Chinese it is a combination of the anti corruption crack down, which is very real, and the struggling economy. Whatever the reasons, they are anxious to move the capital to what they view as a safer haven.

They began the conversations as most all of these Asians so, which is they want to buy a building in New York, San Francisco or Los Angeles. That is all they know. Many people say the Japanese will invest on a generational basis and so can wait for the long term to make their investment pay off. The reality is while some of that is true, the younger generation of Japanese, many of whom have been educated here, are not the same generational investors. They are much more interested in American style investing and 5 to 7 year horizons, spreadsheet analysis and higher returns in the shorter run. The Chinese need to move their capital to a safe haven but they are much more traders and short term investors, with a higher risk tolerance.

I was able to convince a group of these people to bypass New York and to go to look at Denver and other secondary cities on the basis that the internet has dramatically changed where young people are moving to live and work. These cities are now experiencing a surge of growth and night life, are far less expensive places to live and offer a young and vibrant lifestyle. Places like Denver, Raleigh, Austin and others, have high tech hubs growing into job generators and bringing in young, well educated and affluent people, who are seeking a better living situation than ultra high priced cites like New York and San Francisco can offer to those earning less than top incomes. These cities have a real future for real estate and long term growth and value enhancement as the necessary mass grows in these areas to become a permanent population of vibrant people who then stay to raise families.

I was able to convince the group who came here two weeks ago to go to Denver and see what was happening and how that city is growing, and has a real future for investors. They spent two days seeing much of the city and getting a good understanding of what was really happening, and why it made so much more sense to find good value add deals in Denver, and cites like that, than to just buy an office building in Manhattan. To say that they had an awakening would put it mildly. These people had barely heard of Denver and had zero knowledge of what is taking place in cities like that around the US. It was hard to convince them to even get on the plane and go there since they barely knew where Denver was and it was not a place they had heard of form their friends and advisors. It was worth pushing them to go.

Now they are pushing us to provide the offer info on some value add deals in Denver and they are telling their friends and clients back in Tokyo about the opportunity. Two of the people on the trip were family office advisors to wealthy Japanese families looking to move capital.

I would suggest to all of you who deal with offshore investors to insist that they go to a few of these up and coming cities and to see for themselves what is really happening, and the better investment opportunities they offer. That same advice is for fund managers here who have US pension and endowment investors who think there is no liquidity or real value opportunity in secondary cities. They really don't get it. The internet has changed everything about where business is based, and how people and companies can operate very well today from places like Denver, Austin, and Raleigh using digital communication. These cities now have sufficient critical mass of high tech, oil or other industries to make then viable for the long term. It is no longer necessary to have everyone in one physical city. This trend is happening and it is growing faster than most people realize.

Instant Insights /

Secondary Cites Have Excellent Opportuities

Related Stories

Recommended For You