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While luxury real estate has been going strong even amid the pandemic, international investment is the the one branch of the industry that has been hit particularly hard.
Amid border closures and tight travel restrictions, affluent investors from outside the United States have mostly held off on buying real estate in the country this year. Edward Mermelstein, a real estate attorney and founder of luxury consulting company One & Only Holdings, said that the hit to New York City has been profound.
“There are obviously pockets of sales that have taken place over the last six months, but it is a drastic change from what we were seeing about a year ago,” Mermelstein told Inman.
That said, he is also optimistic that a vaccine and new administration could bring international investment back up to former levels. Inman recently spoke with Mermelstein about how the pandemic changed the market, where he thinks the first post-COVID foreign investors will come from, and why he’s feeling optimistic.
Inman: What type of investing and consulting were you doing prior to the coronavirus outbreak?
Edward Mermelstein: Our work has been primarily with investors from overseas. The first group that we started working with were investors from the former Soviet Union and as that experience expanded into representation of other emerging markets, we started working with the Asian market as well as the Middle Eastern market more recently.
The focus was always with emerging markets and assisting those that did not have the types of relationships that you would normally see among Western investors coming into the United States.
And now, COVID has obviously changed everything. Has New York been hit hard by the retreat of international buyers and investors?
The pause actually started long before COVID. We’re looking more at the cyclicality of the markets that started a slowdown in the luxury space, and this goes back a year and a half to two years ago.
A lot of it has to do with the geopolitical issues and the financial meltdown. This applied primarily to our Chinese base, but we also had a significant slowdown from other markets, especially luxury buyers from the former Soviet Union. Politically, their countries started having issues with the United States while their economic position also deteriorated quite a bit over the last couple of years.
So between all those shifts in politics as well as the economy within their own borders, there was a significant slowdown. That slowdown was exacerbated even more because of COVID. That was due to the fact that the countries just stopped issuing visas in March and April, both into the United States as well as into the countries outside of the United States.
There are obviously pockets of sales that have taken place over the last six months, but it is a drastic change from what we were seeing about a year ago.
And, of course, this situation is not unique to New York.
That’s right. The biggest impact we felt was from the Chinese investors because they were the primary pool of investment coming into both the residential and the commercial markets. That’s really made a significant dent in the major U.S. investment markets like New York, San Francisco and Miami.
They are the ones that suffered the most because they were being supported significantly by these pools of investments coming from these other countries.
Which international market, in your opinion, will be the first to flood into the United States post-COVID?
That is the big question. I think we’ll get a better picture of what that’s going to look like after November 4th or at least when we find out who will be heading our next administration.
If we have continuity with the current administration, we can have some expectation that things will continue the way they have for the last two-three years unless there is a renewal of a relationship, whether it’s with China, Russia or the Middle East. The Middle East is currently looking quite strong.
Now if Biden’s administration comes in, our expectation is that there will be a blanket reopening of borders with many of the countries that we work with. [That is] less likely with Russia and the surrounding countries, but the expectation is that if Biden’s administration comes in, we should see much more foreign investment coming back into the United States.
Will the kinds of properties investors want to buy change? Townhomes are currently overtaking condos in sales in many big cities.
It’s a question of where the opportunity lies. There is a readjustment of pricing, which we’re seeing right now. There’s quite a bit of price adjustment happening in many of these new buildings that have not sold as well as expected. The expectation is that as prices come down, there should be pressure on some of these properties simply due to the fact that there’s a lack of new construction.
What we’re currently seeing is that while there’s still a large supply of rental units, the demand on those units is starting to grow. As that number comes down, it will start pushing prices in those rental units further up and that will start pushing the renters back into the buyer pool. That trend typically follows the seven-to-10 year periods that we’ve been seeing over the last 30-40 years.
So when it comes to the post-COVID future and foreign investment, are you cautiously optimistic or not optimistic at all?
I’m always optimistic with respect to the United States. As bad as things are in the United States, they are much worse in other countries. Many other countries are suffering continual depression, especially when it comes to their financial markets.
As we come out of COVID with vaccines and new drugs, I believe the United States is positioned quite well. I’m very optimistic that the United States is going to do quite well and that major markets in the U.S. should rebound.