Mr. Crocker is assistant vice-president for a real estate development and management corporation in San Diego.
American real estate is being bought by foreigners, and this worries a lot of people. Michael Dukakis made a campaign issue out of the large commercial real estate holdings of the Japanese in Los Angeles and other major U.S. cities. The fears generated by this foreign buying appear to be twofold: first is the concern that our national security and sovereignty are somehow compromised when foreigners own our real estate; second is the belief that foreign ownership of U.S. real estate is harmful to our economy. These qualms, however, are based on misconceptions of what is happening in the real estate market.
The concern over national security and sovereignty is understandable given the nature of real estate. When foreigners own land, people naturally fear that they might gain dangerous control over the production and distribution of resources such as grain, oil, and industrial metals. The cost of amassing enough land to have even a small impact on the supply of such resources, however, is too prohibitive to be practicable for any individual or group acting as an agent of a hostile foreign power. And such ownership wouldn’t have an impact on supplies coming in from international markets. Furthermore, all U.S. territory, regardless of the owner’s nationality, comes under the full jurisdiction of U.S. law.
If foreign real estate investment isn’t compromising our national security, is it hurting us economically? The market for real estate in the United States is relatively free. Therefore, as is true of all free markets, no one is forced to sell something to another party. Transactions are consummated only when all parties feel that it is in their best interest to do so.
This means that when a foreigner buys American commercial real estate, he does so because he believes that the risk-adjusted return (and perhaps some prestige value) is worth the investment. At the same time, the American seller believes that the transaction will make him better off. If, as is usually the case, the seller is an on-going business, this means that the owner believes he can get a better return by putting the sale proceeds into another investment than he can get by holding the particular piece of real estate.
The proceeds from real estate sales do not disappear in some mysterious way. The foreign buyer gains a tangible asset, but the compensation received by the seller goes into creating other assets which the seller believes will have a higher risk-adjusted rate of return. Manufacturing corporations selling off real estate can put the proceeds into research and development or new machinery. Real estate development companies can put the money into new projects. Forbidding such transactions on the grounds that the buyer is foreign, therefore, would not merely just keep existing real estate in American hands, but would also prevent the creation of other assets in this country.
When foreigners buy American properties, Americans are fully compensated. In fact, contrary to the belief that foreigners are “buying America on the cheap,” the prices paid by foreigners (especially the Japanese) for American real estate over the past few years in many cases have been well above the traditional market values, as foreigners have been willing to accept a lower return on their investments than have many Americans.
There is no basis for the fear that foreign real estate holdings threaten our sovereignty. And given that we have a free market in real estate, the charge that foreign purchases harm us economically also has no basis. We cannot be harmed if we freely exchange one asset for another which we view as having a better risk-adjusted rate of return. This simple fact of economics-that deals take place in a free market only when all parties involved believe them to be beneficial—applies to real estate just as it applies to all other assets.