A Welcome Development: Foreign Immigration Supports Economic Growth & Real Estate Investment Success
Institutional Real Estate, Inc.
Donald Trump campaigned on an anti-immigration platform, and the first weeks of his presidency involved efforts to ban refugees and travel to the United States from seven Muslim-majority nations. In early August, Sen. Tom Cotton (R.–Ark.) and Sen. David Perdue (R–Ga.) introduced a White House–backed bill to cut legal immigration in half over the next 10 years. The Reforming American Immigration for a Strong Economy Act (or RAISE Act) would halve legal immigration from approximately 1 million people per year to 500,000, and it would institute a points-based system to prioritize high-skilled immigrants.
Such a bill may have difficulty finding support in Congress, and it is unclear whether the legislation has the votes necessary for passage. Even some members of the president’s party have expressed concerns about the proposal. In a statement on social media, Sen. Jeff Flake (R–Ariz.) noted, “I support a merit-based system, but I’m concerned that drastic cuts to legal immigration would run counter to the needs of our economy.”
As the Trump administration has indicated plans to limit immigration (both illegal and legal) to the United States, and has stepped up enforcement and deportation actions, investors may wonder: What would be the impact on commercial real estate and the wider economy if the immigrant population in the United States declines?
A foundation for economic growth
The administration’s focus on limiting immigration should give commercial real estate investors pause. At a fundamental level, real estate investment success depends on economic growth. Population growth is one of the main drivers of economic growth, and so is critical for successful real estate investment. Currently, the United States is only able to achieve replacement levels of population growth via foreign immigration.
The connection between immigration and economic growth is well established. In April, nearly 1,500 economists signed an open letter to President Trump and Congressional leaders expressing their “broad consensus that immigration is one of America’s significant competitive advantages in the global economy.”
Each 1.00 percent increase in immigration creates a 1.15 percent increase in GDP, according to estimates by Adam Ozimek and Mark Zandi, economists at Moody’s Analytics, for ProPublica. As of July 2017, the International Monetary Fund forecast annual GDP growth of 2.1 percent in 2017 and 2018. The Moody’s economists’ analysis for ProPublica indicates an increase in immigration to 8 million people per year would push GDP growth to approximately 4 percent on an annual basis. (Such a policy move is unlikely in the extreme, but it is one possible way to achieve the economic growth levels promised by President Trump during the campaign.) Also in the analysis by the Moody’s economists: If the United States had zero immigration, the country would have only average annual growth of 1.7 percent, which would equate to a cumulative loss of $8.1 trillion in GDP through 2030.
But although population growth may be a prerequisite for economic growth, which is then critical for growth in real estate demand, “you don’t need a lot of population growth to have a place be a successful place for real estate investment. You just need some,” says Richard Kleinman, managing director – research and strategy at LaSalle Investment Management. Kleinman explains the key factor is the balance between real estate demand, which is driven by economic growth and population growth, and real estate supply.
Overall, real estate supply tends not to diminish, as there is not a lot of loss from obsolescence.
“If you have any amount of growth in demand, you can keep that stock full, assuming you don’t have oversupply,” explains Kleinman. “But if you have declining demand, you can very quickly end up in a situation where you have empty space.”
The foreign-born population was 43.2 million in 2015, according to Pew Research Center. Immigrants represent 13.4 percent of the U.S. population — the highest foreign-born percentage in about a century.
In March, Pew Research Center released estimates the United States will see the working-age population grow by 10 million people between 2015 and 2035, at current levels of immigration. But if those flows are cut off, the working-age population would shrink over the next two decades, with 17.6 million fewer people than projected.
As Kleinman points out, “There’s a big difference between 5 percent working-age population growth and declining working-age population growth because that’s the difference between enough to keep the buildings that we have full plus a few more, versus the buildings that we have potentially having space available on a consistent basis and basically some amount of stock becoming obsolete or having to really compete very hard for tenants.”
Aside from a broader impact on economic growth, immigration also has localized effects in specific industries and property markets. The technology industry, for example, benefits from attracting talent from around the world. A restriction on the issuance of high-skilled H-1B visas could have a cooling effect on the tech industry, creating challenging headwinds for investors in tech-oriented property markets, such as California’s Silicon Valley.
Five of the top 10 U.S. metros with the largest foreign-born population are in California, and a list of U.S. cities with large foreign-born populations would overlap substantially with a list of gateway markets. A Yardi Matrix analysis of U.S. migration found immigrants targeting gateway markets, while domestic migrants move toward secondary markets.
Some investors go beyond a general welcoming of growth-driving immigrants, to actively seeking out investments in neighborhoods with large percentages of foreign-born residents. Primestor Development, a retail property developer based in Los Angeles, focuses on underserved urban neighborhoods. The company’s recently developed Azalea Regional Shopping Center is located in South Gate, Calif., a city in Los Angeles County that is more than 90 percent Hispanic or Latino, and more than 40 percent foreign-born, according to 2015 U.S. Census data.
Another project focused on immigrants is the International Village, a proposed development in Ypsilanti, Mich. In May, the city accepted a letter of intent from International Village LLC to develop a 36-acre brownfield site into a $350 million mixed-use community of retail, hotel, office and residential space, including student housing.
In a statement, the City of Ypsilanti reported, “The international village concept will not only capitalize on foreign direct investment, but will also incorporate many Eastern culture design elements. The commercial portions of the development, planned for along Michigan Avenue, are being designed to incorporate international markets, restaurants and wares marketed toward both international and domestic visitors.”
That foreign direct investment is expected to include investors participating in the EB-5 visa program, which offers permanent residence to foreign investors in job-creating businesses in exchange for investments of $1 million, or of $500,000 in targeted employment areas.
Beth Ernat, director of economic development for the City of Ypsilanti, told MLive, “It would serve primarily as a landing pad as people move in the United States, as a comfort area where they are part of the community but still have some familiarity with the culture.”
Effects by property type
The impacts from continuing immigration, or lack thereof, are felt more directly by some property types than others. Apartment properties are the clearest relationship, as population growth equals more potential tenants in a market, and immigrants are more likely to be renters. In addition, immigrant communities frequently cluster, so growth can be concentrated in particular submarkets. Retail, which relies on foot traffic at physical stores, also can be clearly affected by changes in local populations.
Office space demand is more dependent on the business cycle, though it also is affected somewhat by such growth trends. Industrial is somewhat less likely to feel the effects of immigration directly.
“Some industrial is driven by serving the local retailers in terms of storing goods. And that’s pretty direct, like retailing. Others might be about producing things that are related to the local economy, like building materials or contractors,” says Kleinman. “And then at the other end of it, you would have industrial space that is used for production or storage for export, in which case you’re going to be much less linked to immigration in the local population trends. Your demand driver is the national and global economy.”
Regarding more-niche property types, there also could be an impact on the student housing sector. The number of international students, attracted by the country’s world-class universities, has been growing faster than the student population overall. In 2015, there were more than 1 million international university students in the United States, according to the U.S. Department of Commerce, out of a total student population of 20 million. But while university enrollments increased 0.7 percent annually since 2008 and are forecast to grow 1.2 percent annually over the next decade, international student enrollment since the global financial crisis increased 8.4 percent each year, according to the National Center for Education Statistics.
Depending on how much the Trump administration chooses to limit immigration, a drop in foreign enrollment is certainly a possibility, and that could be deleterious for investors in private student-accommodation assets.
But Frederick Pierce, president and CEO of Pierce Education Properties, is not overly concerned about such an impact. He notes, “Given that international students represent only about 5 percent of university enrollments nationwide — albeit a generally higher percentage of purpose-built student-housing residents — changes in international student enrollments would not be expected to have a material impact on the private student-housing market.”
Though, he adds, “All that being said, anecdotally, most every university I have spoken to has said that international student applications are down for fall 2017.”
Counter-effects for investment
An overall pullback in immigration may have a few counter-effects that could be positive for real estate investors. One of those is a drop in construction labor — the trade has high percentages of foreign-born workers — making new development more expensive, as construction wages increase to attract part of a shrinking supply of workers. That could, at the margins at least, be good for the owners of existing properties.
Another possible benefit: A drop in EB-5 visas also might support existing property investors by cutting off a flow of capital to development projects.
“Under the current program, foreign investors, and their spouses and unmarried children under 21, are eligible to apply for a green card — permanent residence — if they make the necessary investment in a commercial enterprise in the United States; and plan to create or preserve 10 permanent, full-time jobs for qualified U.S. workers,” explains Steve Park, a partner with Ballard Spahr.
EB-5 visas can apply to any type of business investment, and although no official statistical data breaks down EB-5 projects by industries, “it is generally accepted and reasonably accurate to say a significant majority, or even more, of the EB-5 projects is focused on real state investment,” says Park.
Large real estate development projects involving long construction periods provide relatively easier ways to satisfy the job-creation requirement under the EB-5 program, through indirect and induced job calculations using economic impact studies, explains Park, compared with tracking and proving job creation through direct hiring of employees.
In addition, EB-5 visas became popular during the last recession, starting in 2008, when many real estate projects faced a significantly depressed capital market. “EB-5 presented a fresh source of capital that also had a much higher risk tolerance and lower rate of expected return on capital, which fit well with real estate construction and development projects,” says Park. “Because the EB-5 industry was relatively new at the time, much of the development in the industry resulted from the experiences gained by the developers, regional centers and industry professionals doing real estate development projects.”
The EB-5 visa program is currently being renewed by short-term extensions to the policy, with the next deadline to extend coming in September. “Most of us in the industry believe that the program will continue to benefit the U.S. economy and will be extended again in September 2017, or permanently authorized at some point in the future,” says Park.
But the EB-5 visa program is very sensitive to changing political tides. “That’s one area where the policy is very front and center,” says LaSalle’s Kleinman. “If there is a cut to that policy, very quickly that capital flow stops.”
For institutional investors in commercial real estate, though, removing that capital flow might actually be a positive.
“A cut there is probably going to be a positive on net for a core real estate investor because generally EB-5 money is about producing new supply,” adds Kleinman.
In addition, EB-5 investors might be more interested in the visa than they are in the real estate investment returns, and so they are willing to take lower returns.
“I don’t think all those projects that get funded with EB-5 would immediately have a U.S. pension fund or institutional real estate adviser looking to snap them up at the same funding level,” agrees Kleinman.
The bottom line
Much of the discussion regarding immigration comes down to a vision of the society we want to create. For many investors in real estate, that society is one of urbanization and growing populations, supported by domestic and foreign migration, that in turn drive economic activity to support a market’s real estate.