The Rest of the Western Hemisphere

By Robert Bach, National Director of Market Analytics, Newmark Grubb Knight Frank

I recently reviewed some capital markets data for Canada, Mexico and South America, and the investor cross-currents are intriguing. These trends are driven by the underlying economies and capital flows in each region.

• Commercial property sales in Canada exhibited the same profile as in the U.S.: a recession-induced plunge from 2007 through 2009 followed by a sharp recovery since 2009, even sharper than in the U.S.
• South America recorded a dip in 2007-2009, but the dip was milder, and the recovery more impressive as sales, measured on a trailing four-quarter basis, hit a new peak in 2011. But by mid-2012, sales levels had fallen off and have drifted even lower since then.
• Mirroring the rest of the Western Hemisphere, the recession kicked Mexican property sales lower, but they stayed down until mid-2012, at which point they began to rise sharply, hitting a new peak by the second half of 2013.

The recession was relatively mild in Canada thanks in part to intelligent banking policies and demand for Canada’s oil and commodities from China, which was spending like gangbusters to keep its own economy from sinking into the global recession. Prospects look bright, fueling demand for properties across Canada’s major markets despite low cap rates.

South America experienced a mild recession in 2009 followed by a strong comeback in 2010 that was driven by commodity exports to China and a growing middle class. South America caught the attention of global property investors during this period, boosting sales. But exports receded as China entered a period of slower growth, and the spike in U.S. long-term interest rates last year pulled some capital out of emerging markets, including Brazil, which sparked domestic inflation and higher interest rates. Property sales volumes, which rose on South America’s strong economic recovery in 2010, have fallen back in tandem with the economic outlook.

Mexico’s economy is tied closely to the U.S., so it experienced a deeper recession than most of South America. Moreover, the economy suffered as manufacturers moved operations first to China and then to Southeast Asia in search of lower costs. But the U.S. economy has rebounded, pulling Mexico along with it, while rising costs in China are pulling manufacturers back to Mexico, with vehicle production targeted to U.S. consumers being especially strong. At the same time, REITs have become active in Mexico, boosting property sales and development of office, logistics and retail projects.

As U.S. property investors expand their horizons in search of higher yields, these regions offer possibilities, but investors should be aware of the different growth drivers in each area.