By Christopher Bechard

In this era of globalization, the temptation to become an international company is more prevalent than ever. The industry has seen many successful examples of REITs going global, notably Simon Property Group's (NYSE: SPG) retail properties in Europe, Japan and North America, as well as Pro Logis' (NYSE: PLD) industrial expansion to Asia, Mexico and across Europe. Still, there remain many companies that feel expanding across borders is not in a company's best interest nor in that of its shareholders.

There are obvious challenges associated with doing business in another country. Various problems or difficulties may arise from doing business in a foreign language, currency and set of laws and regulations. Moreover, unfamiliarity with foreign markets and cultures can make even the most experienced executives uneasy. With the real estate adage of location, location, location, Dorothy's saying in "The Wizard of Oz" often rings true, "there's no place like home."

One way to expand overseas without assuming all of the risk is to form partnerships with local partners who understand local laws, customs and relationships. There is also the viewpoint within the industry that certain sectors might be better suited for globalization, noting the international activities of the retail and industrial sectors but the absence so far of similar activity in the office sector. However, there is no assurance of success for any sector and all companies must be aware of the risk, difficulty and effect that off-shore development may have on the company at home.

"Initiation of global projects takes considerable time and effort, and the learning curve can be steep," says William Hauser, portfolio manager at HVB Capital Management. "Diluting management's time and spending shareholder money on research efforts may not be fruitful without a well-conceived strategy. If and when deals are won, some level of management time and effort will be required for execution and monitoring—even with a local, on-the-ground joint venture partner. Any time spent off-shore is less time spent here at home."

CenterPoint Properties (NYSE: CNT) is one of the leading industrial property companies in North America, with the majority of its portfolio consisting of facilities in the Chicago area. Although CenterPoint is not directly involved in overseas development, it services firms that are, building industrial buildings and distribution facilities in the U.S. that are at the end of a supply chain that begins in China.

Paul Fisher, president and chief financial officer of CenterPoint, says there are numerous risks involved in overseas development, most notably currency risk.

"You're collecting rent in a foreign currency and managing the conversion of that currency back into dollars," Fisher says. "That's a risk that a firm must manage actively and an investor should look at pretty carefully." Problems may also arise due to unfamiliarity with foreign law practices. Fisher cites China as an example of this political risk that is inherent to global expansion.

"In China, do they operate under the rule of law?" Fisher asks. "Can you end up having facilities confiscated? Do you have to worry about who to ‘take care of?' We've always been concerned with these types of risks. In general, managing investment or development long distance in a foreign country is a very risky proposition. We buy or develop over $350 million of facilities annually here in Chicago. That's challenging enough. We're glad we don't have to accomplish that over an ocean."

Challenges not only are found in expansion that spans thousands of miles and many foreign languages; they also can be seen in development that takes place just across our northern border. FelCor Lodging Trust Incorporated (NYSE: FCH) has owned as many as six hotels in Toronto and currently owns two hotels in the area. One of the biggest issues that concerns FelCor in expanding internationally are tax disparities outside the U.S.

"One of the complications for us as a U.S. REIT is the tax impact of owning real estate outside the U.S. where the REIT laws under the IRS code are not available to you," says Thomas Corcoran, president and chief executive officer of FelCor. "So you end up having to [utilize] typical C-corp type structuring to minimize your potential tax liability."

Challenges aside, many REITs simply feel that they are better off focusing on developing their core local markets, where knowledge and experience are already at a high level. Pan Pacific Retail Properties (NYSE: PNP) owns and operates shopping center properties in the Western U.S. Rather than follow some of its retail peers abroad, Pan Pacific plans to continue to expand its portfolio in these select markets, where the company feels it can best continue to perform and serve its shareholders, says Stuart Tanz, chairman, president and CEO.

"In many respects, real estate remains a local business where you must understand the micro dynamics that affect your specific properties and know how to capitalize on those dynamics," Tanz says. "Attaining that knowledge in a foreign market, in a manner that isn't too costly or that risks shareholder value, could be very difficult."

And despite the growth and maturation of the commercial real estate market in the U.S., especially that of the listed REIT sector, the nature of the market in this country leaves plenty of room for further growth, according to Matthew Troxell, principal and portfolio manager at AEW Capital Management.

"The U.S. is unique in the size of the overall real estate market and the fact that there are so many markets within the U.S. Companies have been able to find ways to grow and diversify without expanding globally," Troxell says.