While total commercial real estate investment saw signs of turning the corner between July and September, cross-border investment continued to falter, with deal volumes edging lower in the third quarter.
That’s according to Real Capital Analytics’ (RCA) latest Capital Trends U.S. Big Picture report, which noted that Q3 commercial transaction volume totaled $3.5 billion, down 71% from the $28.3 billion logged during the same quarter last year.
Granted, part of that drop can be attributed to unusual portfolio-level transaction strength during 2019’s third quarter. Consider, for example, that Singapore-based GLP sold a significant selection of industrial assets to a pair of entities controlled by Blackstone last fall. Still, 2020 Q3’s meager deal volume remains an outlier on the low end; the $3.5 billion of deal volume is the lowest level the cross-border market has seen since 2011.
On one hand, the ongoing weakness in investment from abroad is partially explained by the nature of cross-border investment in general. Investors from overseas typically look to put their funds into transactions of substantial scale. Such transactions are usually located in large metropolitan markets — areas that have seen severe drops in demand as consumer sentiments shift toward space and employers grant greater remote-work flexibilities.
The large-scale transaction plunge has been reflected in third quarter transaction volumes. Total investment (cross-border and otherwise) during Q3 was down 57% year over year, and while properties priced $2.5 million to $5 million posted a comparatively small drop of just 38%, assets priced $50 million and higher plummeted 61%.
Simply put, much of the activity that is happening isn’t in the properties and markets that move the needle for cross-border investors, said Jim Costello, senior vice president at RCA.
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“Cross-border investors are usually focused on particular types of properties,” Costello wrote on RCA’s Insights blog. “These investors have large amounts of capital to deploy, and while cap rates might look fantastic in areas like suburban Tulsa, for example, the types of properties these investors pursue are not often found in smaller markets.
“The issue,” Costello continued, “is one of economies of scale.”
As far as the direction of money changing hands, cross-border investors were net sellers of American commercial real estate during the third quarter, though just slightly. Cross border investors sold $59 million more than they bought during Q3, with investors from Asia selling $1.6 billion in assets to lead dispositions for the quarter. Investors from Singapore, Japan and South Korea led the way in sales activity, though RCA noted that sources from the three countries were also active on the buying side.
Middle Eastern investors were also net sellers during the third quarter, with activity on both the purchase (from $1.0 billion in 2019 to $258 million in 2020) and sales (from $2.3 billion to $371 million) sides greatly reduced. Canadian and European investors, meanwhile, were net buyers by a thin margin, acquiring net amounts of $443 million and $520 million in assets, respectively.
