By Brian Reed, AICP, CBRE Research Manager, South Carolina
Based on almost any measure, the South Carolina economy is doing very well. Unemployment rates are low, income growth is rising and the general mood is very positive. Much of this growth can be attributed to the state’s large manufacturing presence, which is strengthened by international demand for South Carolina-manufactured goods. The Charleston and Greenville-Spartanburg industrial markets are among the fastest-growing industrial markets in the country.
While this is all good news for manufacturers in South Carolina, it appears as though the economy of the state’s largest trading partner, China, is slowing. In the face of this slowing economy, the Chinese government allowed a devaluation of their currency, the Yuan Renminbi, hoping to increase domestic consumption while boosting exports. Perceived as a potential threat to global growth, this touched off a global decline in stock markets.
This raises an important question: What is the impact of a slowing Chinese economy on commercial real estate in South Carolina?
To answer this question, we have two issues to consider:
- Impacts of a slowing Chinese economy
- Impacts of currency devaluation
In 2013, China became the largest importer of South Carolina-manufactured goods, surpassing Germany. As such, any ripple in the Chinese economy should be carefully considered by businesses focused on exporting goods to the second-largest economy in the world. It is important to keep in mind that while China’s economy is slowing, it is still growing, albeit at a slower rate.
Regardless of the short-term outlook for the Chinese economy, any manufacturer that successfully caters to the rapidly growing Chinese middle class is positioned to do very well for the long term. We think more emphasis should be placed on the investment impacts of the Chinese economy.
While there has been a lot of ink spilt discussing Chinese currency devaluation, the reality is that the Chinese yuan is one of the only currencies that has held its value well relative to the U.S. dollar. In the last two years, two of the most important international currencies to the United States – the euro and Canadian dollar – have lost 20 to 25 percent of their value.
Over the last 20 years, GDP growth in China has averaged over 9 percent and incomes have grown by more than 700 percent. While incomes are still far below that of the United States, there is little doubt that China has created an incredible amount of wealth over the last two decades. As such, they are emerging as significant international players in commercial real estate markets.
The Chinese commercial real estate investor profiles differently from other international investors, though. While most investors’ primary motivation is maximizing return, the typical Chinese investor is more focused on stability, especially after the recent currency devaluation. Chinese investors have accumulated a lot of wealth that is actively seeking low-risk investment vehicles.
This means much of their capital is heading towards the strongest assets in primary markets, which are generally perceived as less risky than smaller markets due to economic diversity. By our calculation, 97 percent of their commercial real estate investment has been in the 10 largest markets in the country, like New York, San Francisco and Seattle.
With their focus on primary markets, what does this have to do with South Carolina?
Because they are well capitalized and more concerned with stability than return, they are willing to pay more for assets than most domestic investors, especially at the top end of the market. One of the most prominent examples of this is the $1.95 billion purchase of the Waldorf Astoria Hotel in New York by Chinese investors.
Traditional real estate investors focused on getting a solid return are often getting priced out of primary markets. This is causing all investors to broaden their scope in search of strong investment opportunities. As a result, we are seeing more interest from out-of-market investors than we ever have before. This presents an opportunity for owners looking to dispose of an asset, but also for tenants who might be interested in considering a sale-leaseback scenario.
Amid all of the strong growth occurring in the state and despite the growing importance of the Port of Charleston, it is easy to lose sight of the connection between the international and South Carolina economies. The Chinese economy is poised for more growth, especially in the long term. This bodes well for South Carolina’s commercial real estate markets. South Carolina’s status as a supplier of manufactured goods to the country will boost industrial growth in the next decade and, from an investment standpoint, perceived economic instability in China will boost commercial real estate investment prospects in the state.
