Globalization and the Real Estate Industry: Issues, Implications, Opportunities

Real estate has historically been viewed as a local phenomenon. Builders and investors for decades prided themselves in their ability to find the best “location, location, location” based on their local knowledge. It is among the least “tradable” of products, in the sense of being physically unmovable, even though it can be bought and sold both domestically and internationally. This combination of local knowledge and predominantly local tradeability was the primary reason why discussions of globalization in the 1990s and earlier, overlooked the real estate industry as a possible participant in the ongoing phenomenon of increasing global economic integration. Although an occasional headline would be grabbed by a foreign purchase of a local landmark (New York’s Rockefeller Center, Arco Plaza in Los Angeles, and even the Pebble Beach resort), the business itself remained largely local, with US firms dominating in US markets, and foreign firms in foreign markets.

In the last decade, however, globalization has increasingly involved the internationalization of services sectors as much as of manufacturing, and the various sub-sectors of the real estate industry have been enthusiastic participants in this global surge. Builders, brokerage firms, consulting and services firms, real estate finance firms and investors have extended their area of operations beyond local markets to a world-wide base.

Several factors have led to this transformation of the industry. Technological changes have extended the geographic reach and weakened the nexus between “local” and “location”. The increasing opening up of formerly closed economies in the developing world has thrown open significant opportunities for real estate firms across the globe. Liberalization of business licensing, taxation and property ownership regulations in some of the largest emerging real estate markets further facilitates the participation by US real estate firms in global opportunities.

On the financial investment side, securitization and development of a variety of different financial instruments all over the world lend liquidity and tradability to both real estate equity and debt. While foreign investors are able to invest in these financial assets in the US, diversification motives and the search for a different risk-return profile lead many US investors to add foreign real estate physical assets or foreign real-estate-related financial securities to their portfolio. The increasing integration of global financial markets, in their turn, tends to impact the pricing of these assets.

On the demand side, some of the largest consumers of real estate are becoming increasingly global. Multinational firms, with their manufacturing plants, their distributors and suppliers, and now increasingly service sector firms, ranging from financial to legal, have global footprints. Offshoring, or the transfer of production facilities, back-offices and R&D centers by US multinationals to developing countries has given a major boost to commercial real estate in those countries.

Of greater significance or the US real estate industry, major US real estate service firms have followed these clients abroad, expanding the types of services provided, as well as their geographic coverage. Even residential real estate brokerage firms have followed an increasingly mobile expatriate population into the international arena, forging alliances with companies throughout the globe to provide relocation services and worldwide access to residential markets. Additionally, the emergent middle-classes in Asia and elsewhere with their pent up demand have given a boost to residential and retail real estate activity, providing a new range of opportunities for forward-looking US firms. Globalization, in general, and offshoring in particular, have also had direct and indirect effects on the supply chain for real estate construction. Offshoring, made possible by low labor costs in developing countries and advances in transportation and shipping, has led to the global sourcing of inputs, such as steel and wood products. At the same time, US builders are competing for inputs, equipment and resources in the face of growing worldwide demand led by the emerging economies of Asia. China has become both a leading producer and consumer of many building materials, and questions exist as to whether growth will lead to excess capacity or excess demand in coming years. Either could significantly affect the building process and real estate prices in the US.

This article is a preliminary look at the impact of globalization on the real estate industry. We set the context for the study by defining the major elements of the real estate industry, briefly reviewing relevant literature, and discussing the data used in the paper as well as data limitations. The paper then focuses on several aspects of globalization in the US real estate industry. We begin with a description of trends in cross-border investments in real estate and portfolio investments in real estate related activity. We next address issues related to global sourcing and trends in the real estate supply chain. We review future global opportunities for the real estate industry in the context of comparative international statistics and global demographic changes. We then illustrate how these trends affect firm activities and structure, drawing on information from a company database, firm web sites, annual reports, interviews and a survey. We conclude with a discussion of the questions raised by trends in globalization, some challenges to global opportunities, and future research directions.

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