Detroit Not an Isolated Incident — Just the Most Extreme

Rock bottom yields on core assets in primary markets showed no signs of reversal during the second quarter. With limited upside in the segments that have largely defined the commercial real estate recovery up to now, investors are exploring new markets as their tolerance for risk increases. Some large-scale investors, including many cross-border buyers, will face challenges from secondary markets’ relatively smaller asset sizes and a mismatch in liquidity profiles. Even for investors operating on a smaller scale, for which target price points are well suited to mid-cap acquisition opportunities, there is a learning curve in understanding secondary market dynamics.

The fiscal health of cities and states is one of the underestimated sources of risk that investors face as they leave their home turf. The extreme case of Detroit has been presented as an isolated incident, its bankruptcy the most recent chapter in a six-decade story of persistent decline. While Detroit is unmatched for the scale and visibility of its challenges, fiscal mismanagement is endemic to many city governments. Even in the absence of default, the resulting tilt in tax policy can have a corrosive effect on regional competitiveness and a market’s long-term growth prospects. Philadelphia’s wage tax is a case in point.