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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   July 2017

Tune Into Global Real Estate Investment

U.S. commercial properties remain a magnet for foreign capital seeking a safe haven

Much has been said about foreign real estate investment in the United States and the impact it is having on the industry. Commercial mortgage brokers should be tuned into this trend and the implications it has for the clients they represent, given this foreign investment can be a source of deal financing as well.

The major gateway cities — such as New York City, San Francisco, Los Angeles, Washington and Boston — have long been places where funds based in other countries want to place their money as a hedge against economic instability. There are plenty examples of this trend, with high-dollar purchases of significant assets — including offices, apartment complexes and retail centers — in all of those locales.

According to the Association of Foreign Investors in Real Estate (AFIRE), the leading organization tracking foreign investment in U.S. commercial real estate, the leading city in the world for international investment is New York City. This is not much of a surprise based on its very resilient economy. Berlin and London follow, and rounding out the top five are Los Angeles and San Francisco, respectively, both very active metro areas.

Source nations

For the second straight year in the AFIRE’s annual survey, the U.S. ranks as the most desirable country in which to invest money in real estate assets. Industrial and multifamily assets are tied for being the most desirable property types in which to invest, but offices and retail are close behind.

China-based companies are reportedly the largest investors in U.S. commercial real estate. They are followed by a range of investors from other countries, including Canada, sovereign-wealth funds throughout Europe and the Middle East, as well as other countries in Asia.

There are several examples of major commercial real estate transactions by foreign entities that took place recently in gateway cities. In Manhattan, a China-based conglomerate, HNA Group, purchased a 1.8 million-square-foot office building on Park Avenue for a reported $2.2 billion. One of the sellers was Brookfield Properties, which is based in Toronto, and arguably one of the largest owners of office buildings in the U.S., as well as other major cities in the world. 

The reason for this is simple: The fundamentals of commercial real estate in the U.S. are very solid right now. Occupancy rates, rental prices and transactions are at extreme highs.

Industrial and multifamily

Colliers International’s report on the market in 2016 provides evidence of the success of the industrial/warehouse sector as an investment opportunity. Big-box industrial buildings are in high demand because of the space needed by e-commerce merchants and other companies. Colliers said rents in the big-box sector in fourth-quarter 2016 hit $4.66 per square foot, a jump from $4.28 for the same quarter a year earlier.

So, there are obvious reasons why the industrial sector is a draw for out-of-country buyers, based on those numbers, and the increased amount of construction that is trying to meet consumer demand.

The multifamily sector has been the strongest asset class in commercial real estate, overall, for about a decade. The housing crash, among other factors, has made this sector of the industry a stalwart because of the waning homeownership rate in the wake of the mortgage crisis.

One report that came in from the end of 2016, from real estate services company JLL, illustrates that there might be a bit of overbuilding in this sector, however, with multifamily rent growth dipping to 3.8 percent in 2016, down from 5.2  percent in 2015. That doesn’t seem to have dampened investment interest, however, according to JLL. There were $150.3 billion worth of investments made in U.S. apartments last year, significantly beating out prior periods. Foreign investors represented a large part of those transactions.

Competition in core U.S. markets has driven the appetite for cross-border real estate investments toward a broader landscape.

Broader landscape

The road ahead for foreign investment in U.S. commercial real estate leads to the nation’s second-tier markets. Property prices have risen so high in gateway cities like New York and San Francisco that getting a favorable return on your investment can be challenging. As a result, investors, and not just foreign buyers, are looking closely at secondary commercial real estate markets.

The problem with this strategy for these investors is that there are no sure bets. Milwaukee, for example, could be a hot market one year, and then suffer a severe economic crisis the next year for several reasons that would be difficult for an international investor to understand.

Notwithstanding that reality, much less reported is the “off-the-radar” outflow of U.S.-based capital into foreign markets. So-called shadow lenders that operate outside of the banking industries’ regulatory oversight have increasingly continued to make a remarkable investment push into Europe, South and Central America, Asia, Africa and elsewhere. Shadow banking includes entities such as hedge funds, private-equity funds, real estate investment trusts, pension funds, sovereign-wealth funds, endowments and other types of investment vehicles.

Competition in core U.S. markets has driven the appetite for cross-border real estate investments toward a broader landscape. Core-asset allocations have notably migrated from first-tier markets like New York, London, Singapore, Tokyo and key Australian cities to emerging smaller-market locations in the search for higher yields. There is even investment capital moving toward office and luxury multifamily, as well as retail and new development, in emerging markets such as Africa, South America and India.

Global real estate investment, particularly noncore investments in emerging markets, is very risky. Some recent topics on that front were fodder for discussion at the Global Institutional Real Estate Investors Forum in New York City this past April, including tax implications, local politics and regulations, and currency risk, among several other topics.

• • •

Each region of the world that might be targeted for real estate investments has nuances. Smaller companies generally opt for a joint venture with an in-country partner in the case of a foreign investment because of their on-the-ground experiences in a market. That, too, has risk because of transparency issues with some of these foreign players. The focus, as an investor and as a commercial mortgage broker working with buyers or sellers in this market, should be on extreme due diligence, supported by local expertise and a global perspective.


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