How Local Assets Become Global Assets

Separate a real estate market into two parts: investors and occupiers.
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Separate a real estate market into two parts: investors and occupiers.
Miami. (Photo: Caroline Gagné/Flickr)

Miami. (Photo: Caroline Gagné/Flickr)

Can your job be outsourced? A job that cannot be outsourced (i.e. moved to another location where labor is cheaper) is termed "non-tradable." Companies can ship goods anywhere. Therefore, manufactured widgets and manufacturing jobs are tradable. In general, services are non-tradable as long as the customer must be in a certain geographic location to receive it. But if you fly to another country to receive a haircut, all bets are off. Miami's tradable real estate cluster:

Bill Hardin, a real estate professor at Florida International University, likes to tell people that real estate is Miami’s number-one export.

He anticipates the obvious question—How do you export real estate? — and he has a ready explanation.

"In an economic sense, it’s not moving the product," he says. "It’s: where does the money come from that pays for those products?"

Hairdressers who command a globally mobile clientele toil in a tradable industry because revenue comes from outside of the local market. As the geography of demand grows, so does the price. As the geography of supply grows, down goes the price. Intrinsically, the geography of real estate supply is fixed. Hence, Bill Hardin's anticipation of the obvious question: How is real estate tradable?

Miami is on the mental map of investors in global (i.e. tradable) real estate. CBRE offers advice in this sector. The Financial Times interviewed CBRE's chief executive, Bob Sulentic. (See the video accompanying the article.) Sulentic explicitly delineates global real estate consulting services into two categories: investors and occupiers. Investors seek "fortress" or "gateway" geographies such as Miami. They are risk averse and in the market for safe, long-term returns. Occupiers seek properties that aid the attraction and retention of talent. In London, the needs of investors align with the needs of occupiers. Miami's real estate market weighs heavily on the side of investors. Local wages don't justify the local rents.

Concerning investors, Miami and London are global hubs of tradable real estate. For occupiers, Miami real estate isn't tradable. Local wages are out of whack with the quality of real estate supply. In either case, supply chases tradable demand and causes an affordability crisis:

Bruce Percelay, Chair of The Mount Vernon Company, a Boston-based developer and property manager, acknowledges that “there’s a ton” of luxury apartments being built, but he would like to see more rental that’s directed at the middle class. “Right now, we’re in a crisis because construction and land prices [militate against] building for the middle class,” he says.

Regulation does drive up land prices. So does speculative real estate investment as found in Miami. Upzoning could help make housing more affordable in a non-tradable real estate market.