Comparative Advantage

U.S. brokers who understand this business concept will prosper in the global investment arena.

As many commercial real estate professionals begin to explore international real estate opportunities, the concept of comparative advantage offers a useful viewpoint for determining investment direction. The concept describes the benefits of trade between countries. All counties benefit from trade by choosing the highest opportunity-cost products to make while buying the lowest opportunity-cost products from other countries. The concept of comparative advantage comes down to an internal not external comparison.

Property Impact

Generally, comparative advantage has a strong impact in the commercial real estate industry. Looking at the rate of rental space increase in major markets in the world’s cities, brokers realize that rents are going up, capitalization rates are low, and the total valuations are staggering.

For example, Shanghai, China‘s office space rents have increased 15 percent annually for the last three years, with absorption soaking up everything that’s being built. In Moscow, Paris, London, New York, and Hong Kong occupancy costs are through the roof. If brokers consider valuations based on current cap rates, they will see that market values are making unprecedented increases.

The rapidly evolving nature of the global economy has changed some concepts that make comparative advantage a useful approach. Multinational corporations now roam the world, manufacturing, selling, being taxed, and serving customers. Old notions of nationality are giving way to a constant shifting of investments, with commercial real estate professionals seeking returns. Money, too, used to stay in one spot, but now, the world is awash in capital, and this capital is highly mobile across borders.

Countries compete for the attention of multinational corporations by creating incentives, special economic zones, lower taxation, laws, and favorable labor conditions. Comparative advantage continues to affect decisions in the commercial real estate industry.

Economic Factors

Opportunity cost always has been a component of investment analysis. Now, it has a more complex nature, since investment capital can seek a wider universe of alternatives. For example, the Chinese renminbi is likely to gain 8 percent against the dollar in 2008. When the euro was launched in 2001, it was introduced at 1:1 to the dollar, and currently is at 1.42.

Currency fluctuations add to the shift in property values. From an international investor’s perspective, the dollar is in a prolonged decline. Based on long-term cash flow, U.S. real estate is less attractive to them, while U.S. investors have found a plethora of opportunities overseas. So leaving taxation aside, it’s clear that currency trends, on top of the investment return, create a different scale for estimating investment opportunity cost.

Investment Impact

The definition of comparative advantage also has shifted for investment decisions. The North American Free Trade Agreement created an entirely new commercial real estate category called maquiladoras along the Mexican border. China’s rise as a world manufacturing power stole low-value, high-labor products from Mexico, but luckily the country didn’t lose jobs or business.

Mexico now is strong in petrochemicals, the auto industry, and the food and beverage industry. The country actually gained 100,000 jobs overall at the same time it was losing apparel and textile business to China. This rapid job growth demonstrates that many international industries need varying types of local commercial real estate at different times. Development and investment that follow these rapid changes will benefit greatly.

Negative Impact

In the 1980s, Japan looked as if it were taking over the world. Then from 1992 to 2004, Japanese property prices fell every year –- especially commercial real estate prices. Systematic problems in Japanese business culture set the stage for inflated asset prices that proved to be unsustainable. Banking and the real estate industry had common practices that prevented healthy adjustments in prices and supply, leading to a long-term, largely unforeseen economic decline. The nature and the size of the economic setback for Japan, the world’s second-largest economy at that time, were severe, unexpected, and sustained.

Since yields and capital can easily move across borders, commercial real estate professionals soon will find it necessary to describe to their clients and colleagues differences between local and global investments. The upside is that the economic waves keep on growing, clearing the way for brokers and investors who learn and adapt to prosper in the commercial real estate industry.

Bruce Haulley, CCIM

Bruce A. Haulley, CCIM, currently lives and works in Shanghai, China. Contact him at