by Terry Cunnew
What is one to make of a nation which is a superpower, yet has a budget deficit more in keeping with a banana republic; which is a bastion of capitalism where there is talk of protectionism raising its ugly head?
The USA currently offers its fair share of contradictions and many of them are unlikely to be resolved until after the presidential elections in October.
No action is likely to be taken over the budget deficit by the incumbent president, who will not want to scupper the chances of the Republican candidate. And both the Republican and Democrat nominees are steering clear of stating bluntly the unpalatable truth about the deficit — the fact that putting it right is going to hit voters in their pockets.
On the question of protectionism, there has been a fair amount of posturing on this issue, much of it from the Democrats, and its electoral appeal is not hard to understand.
A lot of voters would be only too happy to see America erecting tit for tat trade barriers against rivals such as Japan or Korea.
Unfortunately, the underlying impulse towards trade barriers in some quarters is also being manifested in the real estate market, where spectacular levels of activity by Japanese investors have sparked off calls to introduce restrictions on foreign ownership of US real estate.
It is true that, in some cases, Japanese investors have been rather less than sensitive in their investment activities. In Hawaii, for instance, there have been cases of wealthy individuals buying up whole portfolios of residential property in the course of a whirlwind visit, thus putting up house prices and alienating the locals.
There have also been protests at the amount of real estate which the Japanese have been acquiring in Washington DC — one suspects that there is something of a gut reaction among some sectors of the community against prominent slices of the national capital being bought up by those who were, for many, a former enemy.
On the plus side, there does appear to be a recognition among the Japanese themselves that some investors have been rather insensitive, while at the same time the process of learning about the US real estate market has reached the point where the problem is starting to solve itself.
In common with other offshore investors who preceded them, the Japanese are now starting to become more sophisticated and to realise that there are real opportunities in the market outside the high-profile properties which make the headlines.
Because of this, the general view in real estate circles is that pressures to introduce restrictions on foreign ownership will fade away as the activities of foreign investors become more diverse and less spectacular.
It is sincerely to be hoped that this proves to be the case, since any general barrier against real estate investment would be deeply offensive to the many long-standing investors, mainly European, whose own markets have been as open as those of the USA.
The probability is that realism will prevail, since a return to the isolationist philosophy of pre-second world war days would be unthinkable — the world is not like that any more.
At another level, a number of factors have been coming together to change the US real estate market, not least of which is the change in the tax laws.
Prior to the 1986 Tax Act a lot of real estate development deals were put together with more regard to their tax shelter qualities than to any prospect of their standing up as realistic property propositions.
Indeed, many deals appeared to offer no foreseeable prospect of performing in property investment terms — everything hinged on the tax shelter.
With the tax shelter element removed, developments now have to perform in purely real estate terms, which has meant a shift in the profile of sources of capital for new projects.
One useful by-product of this has been that offshore investors are now on a more even footing with their US counterparts in seeking new investment opportunities — all the serious players are now essentially after the same thing.
Another change is in the nature of the major investors in real estate. Where the syndicators are still in the field they are now income-motivated rather than tax-motivated, so that they when bid it is no longer at the very low yields which prevailed when tax shelter was the deciding factor.
At the same time, US banks have been given greater freedom to operate nationwide, rather than being restricted to one particular state.
The creation of interstate banking has already led to the emergence of some very large regional organisations which will inevitably evolve into national organisations with potentially colossal economic clout.
The combination of these various factors may help to prevent the levels of overbuilding which many centres have seen in recent years, with some cities suffering over 30% vacancy in downtown office supply and often even higher levels in the suburbs.
But another, historically surprising, factor in the US real estate market is the increasing entry of politics into the process. Not the politics of behind the scenes dickering at city hall but the ballot box politics of electors putting forward proposals to be voted on which can profoundly affect the market.
Such propositions can, if they attract sufficient initial support, be put forward for public ballot by all the electorate. If a majority of voters support the proposition, the politicians are left with little room for manoeuvre — the thing more or less has to become law.
And increasingly there is a tendency for local electors, particularly in the more economically successful communities, to call for slower and more controlled rates of growth than previously seen.
The populace are more and more demanding that developers be made to take account of the consequences of their developments in terms of environmental impact, traffic generation and the like. And they are demanding that, if developers are to be given the go-ahead to carry out projects, they must also contribute to the solution of such problems as increased traffic.
Another phenomenon which is becoming more widespread is the insistence of planning gain in the form of low-cost housing for the poorer sections of the community. Increasing numbers of cities are now making this a condition of development, requiring developers either to build or pay for a quantity of such housing.
At the same time, conservation is now very much accepted in many cities, with the result that developers today have to pay close attention when local conservationists comment on their proposals.
While the local conservation society might be relatively small in numbers it tends to have considerable influence on the general public, and this is inevitably reflected among elected representatives at city hall.
In the longer-established cities, such as Boston and Washington, strong development controls help to create a more stable market which does not suffer from the spectacular overdevelopment seen in some of the Sun Belt cities.
Development controls also help to make these older centres much more familiar to European investors and developers who are used to dealing with such things on their home turf.
Indeed, the north-eastern cities of the USA generally are attractive to investors in that they tend to have the lowest levels of office vacancy and, consequently, the most stable markets.
The most recent survey study by leading real estate firm Coldwell Banker showed a vacancy in downtown Boston of only 8.1%, with 9.8% in Midtown Manhattan and 11.2% in Downtown Washington.
It is true that such vacancy levels are high by current European standards, but in American eyes they are seen as healthy. Indeed, many would argue that the sort of vacancy levels seen in Europe are unhealthy and that a market cannot perform properly without a stock of somewhere around 10% available for leasing.
And there is no questioning the fact that the Boston, New York and Washington markets do perform, and so draw developers and investors like bees to honey.
